Question

Exercise 10-3A Computing bond interest and price; recording bond issuance LO C2 Bringham Company issues bonds with a par value of $530,000 on their stated issue date. The bonds mature in 5 years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 12% (Table B.1. Table B. 2. Table 8.3. and Table 8.4) (Use appropriate factor(s) from the tables provided.) 1. What is the amount of each semiannual interest payment for these bonds? 2. How many semiannual interest payments will be made on these bonds over their life? 3. Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium 4. Compute the price of the bonds as of their issue date. 5. Prepare the journal entry to record the bonds Issuance, Complete this question by entering your answers in the tabs below. Req 1 to 3 Reg 4 Reg 5 What is the amount of each semiannual interest payment for these bonds? How many semiannual interest payments will be made on these bonds over their life? Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium. Par (maturity) value Semiannual Rate Semiannual cash interest payment

Answer 1

1-3)

Par (maturity) value		Semiannual Rate		Semiannual cash interest payment
$530000	*	5%	=	$26500
Number of payments		(5*2)= 10
Whether the bonds are issued at par, at a discount, or at a premium?				Discount

Semiannual rate=10%*6/12= 5%

When the contract rate is lower than the market rate that means the bonds are issued at discount. In this case, the contract rate is 10% while the market rate is 12% that means contract rate is smaller than the market rate. Hence, the bonds are issued at discount.

4)

Table values are based on:
n=	10
i=	(12%/2)= 6%
Cash Flow	Table value		Amount		Present value
Par (maturity) value	0.5584	*	$530000	=	$295952
Interest (annuity)	7.3601	*	$26500	=	195043
Price of bonds					$490995

5)

Transaction	General Journal	Debit	Credit
1.	Cash	$490995
	Discount on bonds payable (530000-490995)	$39005
	Bonds payable		$530000
	(To record bonds issued at discount)