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On January 1, 2020, Drilling Company issued ten-year bonds with a face value of $10,000,000 and...

On January 1, 2020, Drilling Company issued ten-year bonds with a face value of $10,000,000 and a stated interest rate of 4%, payable semiannually on June 30 and December 31. The bonds were sold to yield 3%.

           

Instructions

1-Calculate the issue price of the bonds.

2-Record the bond issuance

3-Record the first interest payment and use the straight line method to amortize the discount or premium.

Solutions

Expert Solution

Answer to Requirement 1:

Face Value of Bonds = $10,000,000

Annual Coupon Rate = 4.00%
Semiannual Coupon Rate = 2.00%
Semiannual Coupon = 2.00% * $10,000,000
Semiannual Coupon = $200,000

Time to Maturity = 10 years
Semiannual Period = 20

Annual Interest Rate = 3.00%
Semiannual Interest Rate = 1.50%

Issue Value of Bonds = $200,000 * PVA of $1 (1.50%, 20) + $10,000,000 * PV of $1 (1.50%, 20)
Issue Value of Bonds = $200,000 * 17.1686 + $10,000,000 * 0.7425
Issue Value of Bonds = $10,858,720

Answer to Requirement 2 and 3:

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $10,858,720 - $10,000,000
Premium on Bonds = $858,720

Semiannual Amortization of Premium = Premium on Bonds / Semiannual Period
Semiannual Amortization of Premium = $858,720 / 20
Semiannual Amortization of Premium = $42,936

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $200,000 - $42,936
Semiannual Interest Expense = $157,064

jeff jeffy answered 1 year ago
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