Question

Brief Exercise 118 On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: 10 Pret of 10 Profor101 Pret of 20 per Pr o forper Pre of 10145 wo Calculate the issue price of the bonds.

Answer 1

Issue price of bond = Present value of 1 + Present value of Annuity

To calculate present value of 1:

Ten year bond FV = $ 5,000,000

Interest payable semiannually; though bond is for 10 years, period has to be considered as 20 (i.e.) 10 year multiplied by 2.

Market interest rate = 12% per annum, so take as 6% per period.

As per factor table provided, apply factor of present value of 1 for 20 period at 6% = 0.312

So, Present value of 1 = $ 5,000,000*0.312 = $ 1,560,000

To calculate present value of Annuity:

Interest rate of bond = 10% per annum (i.e.) 5% semiannually

So total Interest = 5000000*5% = 250,000

As per factor table provided, apply factor of present value of annuity for 20 period at 6% = 11.470

So, present value of annuity = $250,000*11.470 = $2,867,500

Thus, issue price of bond = $ 1,560,000+$2,867,500 = $4,427,500

___________________________________________________________________________________________________

Amortisation schedule for issue price of $ 4,420,000

Amortisation schedule based on Effective Interest rate method
Face value of Bond	5000000
Stated Interest Rate	5%	Semiannually
Interest as per stated rate	250,000
Effective Interest Rate	6%	Semiannually
Date	Stated Interest	Interest Expense	Amortisation	Carrying Amount
		Carrying amount multiplied by effective interest rate	Effective interest less stated interest
1/1/2018				4,420,000
6/30/2018	250,000	265,200	15,200	4,435,200
12/31/2018	250,000	266,112	16,112	4,451,312