On January 1, 2017, Learned Inc, issued $16 million face amount of 20-year, 18% stated rate...
On January 1, 2017, Learned Inc, issued $16 million face amount of 20-year, 18% stated rate bonds when market interest rates were 20%. The bonds pay interest semiannually each June 30 and December 31 and mature on December 31, 2036.
- Calculate the proceeds (issue price) of Learned Inc.’s, bonds on January 1, 2017, if the bonds were sold to provide a market rate of return to the investor.
- Assume instead that the proceeds were $16,411,000. Record the journal entry to show the payment of semiannual interest and the related premium amortization on June 30, 2017, if the premium of $411,000 is amortized on a straight-line basis.
Homework Answers
Answer a.
Face Value of Bonds = $16,000,000
Annual Coupon Rate = 18.00%
Semiannual Coupon Rate = 9.00%
Semiannual Coupon = 9.00% * $16,000,000
Semiannual Coupon = $1,440,000
Time to Maturity = 20 years
Semiannual Period = 40
Annual Interest Rate = 20.00%
Semiannual Interest Rate = 10.00%
Issue Price of Bonds = $1,440,000 * PVA of $1 (10.00%, 40) +
$16,000,000 * PV of $1 (10.00%, 40)
Issue Price of Bonds = $1,440,000 * 9.779051 + $16,000,000 *
0.022095
Issue Price of Bonds = $14,435,353
Answer b.
Issue Value of Bonds = $16,411,000
Premium on Bonds Payable = $411,000
Semiannual Amortization of Premium = Premium on Bonds Payable /
Semiannual Period
Semiannual Amortization of Premium = $411,000 / 40
Semiannual Amortization of Premium = $10,275
Semiannual Interest Rate = Semiannual Coupon - Semiannual
Amortization of Premium
Semiannual Interest Rate = $1,440,000 - $10,275
Semiannual Interest Rate = $1,429,725
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