In: Finance
Exercise 10-3A Computing bond interest and price; recording bond issuance LO C2
Bringham Company issues bonds with a par value of $610,000 on
their stated issue date. The bonds mature in 9 years and pay 9%
annual interest in semiannual payments. On the issue date, the
annual market rate for the bonds is 12%. (Table B.1, Table B.2,
Table B.3, and Table B.4) (Use appropriate factor(s) from
the tables provided.)
1. What is the amount of each semiannual interest
payment for these bonds?
2. How many semiannual interest payments will be
made on these bonds over their life?
3. Use the interest rates given to select whether
the bonds are issued at par, at a discount, or at a premium.
4. Compute the price of the bonds as of their
issue date.
5. Prepare the journal entry to record the bonds’
issuance.
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Note: Enter debits before credits.
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Answer 1.
Face Value of Bonds = $610,000
Annual Stated Interest Rate = 9.00%
Semiannual Stated Interest Rate = 4.50%
Semiannual Interest Payment = Semiannual Stated Interest Rate *
Face Value of Bonds
Semiannual Interest Payment = 4.50% * $610,000
Semiannual Interest Payment = $27,450
Answer 2.
Time to Maturity = 9 years
Semiannual Period to Maturity = 18
Number of Semiannual Interest Payment = 18
Answer 3.
Annual Market Interest Rate = 12.00%
Semiannual Market Interest Rate = 6.00%
Market interest rate is higher than the stated interest rate. So, the bonds are issued at a discount.
Answer 4.
Present Value of Maturity Value = $610,000 * PV of $1 (6%,
18)
Present Value of Maturity Value = $610,000 * 0.3503
Present Value of Maturity Value = $213,683
Present Value of Interest = $27,450 * PVA of $1 (6%, 18)
Present Value of Interest = $27,450 * 10.8276
Present Value of Interest = $297,218
Answer 5.