Question

On June 30, 2018, Singleton Computers issued 5% stated rate bonds with a face amount of $320 million. The bonds mature on June 30, 2033 (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, 2018. (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, 2018. 2. Calculate the interest expense Singleton reports in 2018 for these bonds using the effective interest method.

Answer 1

	Principal				320,000,000.00
	interest	(320,000,000*2.5%)=			8,000,000.00
	where I =		2%
	t=		30	years
1)	Calculation of bond issue price
	principal	*	PV of $1	=
	320,000,000.00	*	0.55207	=	176,662,400
	interest
	8,000,000.00	*	22.39646	=	179,171,680
	total				355,834,080	answer
	Journal Entry
	Accounting titles & Explanations				Debit	Credit
	Cash				355,834,080
	premium on bonds payable					35,834,080
	bonds payable					320,000,000
2)	interest expense = 355,834,080*2%
		7,116,682	answer
						Principal 320,000,000.00 interest (320,000,000*2.5%)=       8,000,000.00 where I = 2% t= 30 years 1) Calculation of bond issue price principal * PV of $1 = 320,000,000.00 * 0.55207 =         176,662,400 interest       8,000,000.00 * 22.39646 =         179,171,680 total        355,834,080 answer Journal Entry Accounting titles & Explanations Debit Credit Cash         355,834,080 premium on bonds payable           35,834,080 bonds payable         320,000,000 2) interest expense = 355,834,080*2% 7,116,682 answer