Question

On January 1, 2017 Pioneer Co. issued $550,000 of 5 year 12% bonds for $592,468 yielding a market rate of 10%. Interest is payable semiannually on June 30 and December 31.

a) Confirm the bond issuance price and show your work.

b) Why are two different present value tables used to price the bond?

c) Is this bond issuing at a discount, premium or par? Explain your answer.

d) Create your own amortization table. The table should show the carrying value at January 1 as the first row. Include 2 full years of interest payments. Refer to the videos and text for amortization table examples.

e) Record the following entries on the included Financial Statement Impact Template. a. Jan 1, 2017 bond issuance b. June 30, 2017 interest payment c. Dec 31, 2017 interest payment

f) This company chose to issue a bond as means to raise capital. Identify two reasons a company may choose this type of financing.

Answer 1

a) Coupon Payment = $550,000 * 12% / 2 = $33,000

In the last period i.e 10, we will get Coupon interest + Principal value

Annual Discount Rate is 10%, so the semi annual discount rate is 5%. Hence we have taken discounting factor as 5%.

Period	Amount	Disc. Fac @ 5%	Present Value
1	$           33,000	0.952380952	$               31,429
2	$           33,000	0.907029478	$               29,932
3	$           33,000	0.863837599	$               28,507
4	$           33,000	0.822702475	$               27,149
5	$           33,000	0.783526166	$               25,856
6	$           33,000	0.746215397	$               24,625
7	$           33,000	0.71068133	$               23,452
8	$           33,000	0.676839362	$               22,336
9	$           33,000	0.644608916	$               21,272
10	$       5,83,000	0.613913254	$           3,57,910
	Bond Price		$           5,92,468

c) The bond is issuing at premium since the face value is $550,000 and it is sold at $592,468. The bond is having coupon rate of 12% whereas the market rate is 10% and hence it is having premium over its face value.

d) Amortisation Schedule

Date	Interest @ 10%	Coupon Payment	Reduction in Principal Amount	Closing Principal
Jan 1, 2017				$    5,92,468
Jun 30, 2017	$              29,623	$                   33,000	$         3,377	$    5,89,091
Dec 31, 2017	$              29,455	$                   33,000	$         3,545	$    5,85,546
Jun 30, 2018	$              29,277	$                   33,000	$         3,723	$    5,81,823
Dec 31, 2018	$              29,091	$                   33,000	$         3,909	$    5,77,914

e) Journal Entries :

Date	Particulars	Debit	Credit
Jan 1, 2017	Cash A/c	$           5,92,468
	To Bonds Payable		$     5,92,468
	(Being Bonds Issued at Premium)
June 30, 2017	Bonds Payable A/c	$                 3,377
	Interest Expense A/c	$              29,623
	To Cash		$         33,000
	(Being Interest accrued & paid)
Dec 31, 2017	Bonds Payable A/c	$                 3,545
	Interest Expense A/c	$              29,455
	To Cash		$         33,000
	(Being Interest accrued & paid)