Question

Bond issue price and premium amortization

On January 1, 2013, Piper Co. issued ten-year bonds with a face value of $4,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

Present value of 1 for 10 periods at 10%..................	.386
Present value of 1 for 10 periods at 12%..................	.322
Present value of 1 for 20 periods at 5%....................	.377
Present value of 1 for 20 periods at 6%....................	.312
Present value of annuity for 10 periods at 10%.........	6.145
Present value of annuity for 10 periods at 12%.........	5.650
Present value of annuity for 20 periods at 5%...........	12.462
Present value of annuity for 20 periods at 6%...........	11.470

Instructions

(a) Calculate the issue price of the bonds.

(b) Without prejudice to your solution in part (a), assume that the issue price was $3,536,000. Prepare the amortization table for 2013, assuming that amortization is recorded on interest payment dates.

Answer 1

• All working forms part of the answer
• Requirement ‘a’

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

A	Face Value of Bond	$      4,000,000.00
B	Term (years)	10
C = 10 years x 2 semi annual payment	No. of interest payments	20
D	Present Value of $1 for 20 periods	0.312
E = A x D	Present Value of Bond's face Value	$      1,248,000.00
F	Face Value of Bond	$      4,000,000.00
G = 10% x 6/12	Semi Annual interest rate	5%
H = F x G	Interest payment	$          200,000.00
I	Present value of annuity for 20 periods at 6%	11.470
J = H x I	Present Value of Interest Payments	$      2,294,000.00
K = E + J	Total Issue Price of Bond	$      3,542,000.00

• Requirement ‘b’

--Expanded Amortisation Table for 2013, along with working is provided below:

	Interest paid in Cash	Interest Expense	Discount Amortised	Unamortised Discount	Carrying Value of Bond	Face Value of Bond
	[A = 4000000 x 10% x 6/12]	[B = F x 12% x 6/12]	[C = B - A]	[D = D - C]	[E = E + C]	[F = D + E]
01-Jan-13				$        464,000	$        3,536,000	$        4,000,000
30-Jun-13	$              200,000	$                212,160	$                            12,160	$        451,840	$        3,548,160	$        4,000,000
31-Dec-13	$              200,000	$                212,890	$                            12,890	$        438,950	$        3,561,050	$        4,000,000