Exercise 10-3A Computing bond interest and price; recording bond issuance LO C2 Bringham Company issues bonds...

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.

Table Values are Based on:
n =
i =
Cash Flow	Table Value	Amount		Present Value
Par (maturity) value		$610,000	=
Interest (annuity)		$27,450	=
Price of bonds				$0

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

Solutions

Expert Solution

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.

jeff jeffy answered 1 year ago

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