Question

[The following information applies to the questions displayed below.] Cron Corporation is planning to issue bonds with a face value of $700,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

1. What was the issue price on January 1 of this year?

2. What amount of interest expense should be recorded on June 30 and December 31 of this year?

3. What amount of cash should be paid to investors June 30 and December 31 of this year?

4. What is the book value of the bonds on June 30 and December 31 of this year?

Answer 1

Bond Valuation Issue Date Bond Face Value Bond Interest rate Market Interest Rate (Yield rate) Bond tenure Interest payments Method of Amortization January 700000 13% 12.0% 5 Years Semi Anually Effective Rate Method n = Cash Proceeds on Bonds Payable 10 6.00% Cash Flows A mount PVF ,PVAF Presents Value Interest 45500 7.36009 334884 Principal 700000 0.55839 390873 Yenn Realise the Sales of the Bond 725757 Answers Issue Price of the Bond Interest Expenses Cash Paid Book Value Jun-30 43545 45500 723803 725757 Dec-31 43428 45500 721731

Amortization Sechedule Change in Cash Paid Interest Carraying Interest Expense Value Date Jan-00 Jun-30 Dec-31 Carrying Value 725757 723803 721731 45500 45500 43545 43428 1955 2072 Cash interest 700000*13%*6/12 Interest Expenses 72575712%*6/12 interest Expneses =723803*6/12*12% 45500 43545 43428