In: Accounting
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $3,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .627
Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652
26. The present value of the principal is
a. $2,136,000.
b. $1,602,000.
c. $2,492,000.
d. $1,508,000.
27. The present value of the interest is
a. $1,048,680.
b. $1,398,240.
c. $1,390,400.
d. $1,307,320.
28. The issue price of the bonds is
a. $3,534,240.
b. $2,650,680.
c. $3,558,240.
d. $2,998,400.
Face value | 3,000,000 | ||
YTM | 8% | ||
Payment frequency | semiannual | ||
Bond years | 8 | ||
So effective semiannual periods | 16 | ||
Semiannual Interest | 4.00% | ||
PV of 1 for 16 period at 4% | 0.534 | ||
Solution 26 | |||
So PV of principal | 3000000*0.534 | ||
1,602,000 | |||
So option B is correct | |||
Solution 27 | |||
Interest rate | 6% | ||
Interest payment semiannual | 3000000*6%*1/2 | ||
90,000 | |||
PV of annuity for 16 period @ 4% | 11.652 | ||
PV of Interest payments | 90000*11.652 | ||
1,048,680 | |||
So option A is correct | |||
Solution 28 | |||
Issue price of Bond= | PV of Principal + PV of Interest | ||
Issue price of Bond= | 1,602,000 + 1,048,680 | ||
Issue price of Bond= | 2,650,680 | ||
So option B is correct | |||