Question

Exercise 5-17 (Algo) Price of a bond; interest expense [LO5-9, 5-10]

On June 30, 2021, Singleton Computers issued 5% stated rate bonds with a face amount of $280 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 4% (2.0% semiannual rate). Interest is paid semiannually (2.5%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds on June 30, 2021.
2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.
Total Values are based on:

n=	30
i=	2.0%
Cash Flow	Amount	Present Value
Interest	?	?
Principal	$280,000,000	154,579,600
Price of bonds:		?

Required 2:

Period-End	Cash Interest Expense	Bond Interest Expense	Premium Amorization	Carrying Value
6/30/2021	--------------------------	--------------------------	-----------------------	?
12/31/2021	?	?

I need help solving the blanks that have question marks

Answer 1

Requirement 1:

Table values are based on:

n=30

I=3.50%

Cash Flow      Amount Present Value

Interest $8,000,000 $147,136,400

Principal $200,000,000 $71,256,000

Price of bonds $218,392,400

n = No. of interest payments = 15 years x 2 times = 30
i = Semi-annual market rate = 3.5%

Calculations:
Interest payment = Face value of the bond x Interest rate =
200,000,000 x 4% = $8,000,000

Present value of the interest payments $147,136,400

[$8,000,000 x 18.39205 present value annuity factor (3.5%, 30
years)]

Present value of the face value of the bond $71,256,000

[$200,000,000 x 0.35628 present value factor (3.5%, 30 years)]

Price of the bonds $218,392,400

Requirement 2:

Amortization schedule under effective interest method:

Period-End Cash interest paid Bond interest Expense Premium amortization Carrying value

6/30/2021 $218,392,400

12/31/2021 $8,000,000 $7,643,734 $356,266 $218,036,134

Explanation:
Cash interest paid = $200,000,000 x 4% = $8,000,000
Bond interest expense = Preceding carrying value x 3.50%
Premium amortization = Cash interest paid - Bond interest
expense
Carrying value = Preceding carrying value - Premium
amortization