Question

In: Accounting

Gleason Enterprises issued 12%, 7-year, $2,630,000 par value bonds that pay interest semiannually on October 1...

Gleason Enterprises issued 12%, 7-year, $2,630,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2020, and are issued on that date. The discount rate of interest for such bonds on April 1, 2020, is 14%.

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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What cash proceeds did Gleason receive from issuance of the bonds? (Round answer to 0 decimal places, e.g. 125.)

Cash proceeds from issuance of the bonds

Solutions

Expert Solution

  • Cash proceeds from issuance of the bond = $ 2,400,002 (or $ 2,400,000 or $ 2,400,001 depending upon rounding off)
  • Concept

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

  • Data

Face Value

$         2,630,000.00

Term (in years)

7

Total no. of interest payments

14

Annual Rate

Applicable rate, because of Semi Annual payments

Market Rate

14.0%

7.0%

Coupon Rate

12.0%

6.0%

  • Answer calculation

Amount

PV factor

Present Values

PV of Face Value of

$                    2,630,000.00

0.38782

$                 1,019,966.60

PV of Interest payments of

$                       157,800.00

8.74547

$                 1,380,035.17

Issue Price of Bonds

$                 2,400,001.77


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