Question

The company issues 6% 10-year bonds with a total face amount of $1,000,000 with interest paid semi-annually. The market rate of interest is 6.1%. n% 106.00%0.55839 7.3601 106.10%0.55315 7.3253 20 3.00% 0.55368 14.8775 203.05%0.54833 14.8089 PV PVA ROUND ANSWERS TO NEAREST DOLLAR What is the issue price of the bond? $ .Record the issuance of the bond: 3. What is the interest expense for the first interest payment? $_ What is the bond liability after the first interest payment? $ 5What is the interest expense for the second interest payment? $ 4

Answer 1

Question 1

Answer-----------$ 992,597

.

Question 2

Answer-----------

Account Title and Explanation	Debit	Credit
Cash	$ 992,597
Discount on bonds payable	$ 7,403
Bonds payable		$ 1,000,000
(To record Issuance of bonds )

.

Question 3

Answer-----------$30,274

.

Question 4

Answer-----------$ 992,871

.

Question 5

Answer-----------$30,283

.Working

Year end	Cash paid	Interest expense	Change in carrying value	Carrying value
Issue				$             992,597
First interest payment	$        30,000	$        30,274	$               274	$             992,871
Second interest payment	$        30,000	$        30,283	$               283	$             993,154

.

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 1,000,000
Market Rate	6.10%	3.05%		Term (in years)	10
Coupon Rate	6.00%	3.00%		Total no. of interest payments	20

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$         1,000,000	at	3.05%	Interest rate for	20	term payments
PV of $1	0.54833
PV of	$         1,000,000	=	$ 1,000,000	x	0.54833	=	$ 548,330	A
Interest payable per term	at	3.00%	on	$ 1,000,000
Interest payable per term	$ 30,000
PVAF of 1$	for	3.05%	Interest rate for	20	term payments
PVAF of 1$	14.80893
PV of Interest payments	=	$ 30,000	x	14.8089	=		$ 444,267	B
				Bond Value (A+B)			$                    992,597