Question

Nordic Company issued bonds with the following provisions: Maturity value: $60,000,000 Interest: 7.9 percent per annum payable semi-annually each June 30 and December 31. Terms: Bonds dated January 1, 2017, due five years from that date. The company's fiscal year ends on December 31. The bonds were sold on January 1, 2017, at a yield of 8 percent. Required: 1. Compute the issue (sale) price of the bonds. (Round time value factor to 4 decimal places. Round the final answer to the nearest whole dollar.) Issue (sale) price

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Answer 1

Answer

Answer 1 It is reasonable that a bond promising to pay only 7.9% interest will sell for discount i.e. less than its face value when the market is expecting to earn 8% interest. Present value of bond to be issued Bond Rate 7.90% Semi-annual 3.95% Market rate 8.00% Semi-annual 4.00% Face Value or Maturity Value 60,000,000 Present Value of Bond / Issue Price 59,758,833 Life 5 Semi-annual 10 1 Discount -241,167 .791% The PV of the Bond=PV of Interests+PV of Bond Maturity Value PV of Interest Interest Payment=Coupon Rate *FV Annuity Factor=(1-(1+r)^-N)/r r=Market Rate 2,370,000 8.11090 PV factor up to 4 decimal places 4.00% 10 19,222,833 A N= The Present Value of Interest PV of Bond Maturity Value=Face Value *PV factor for N Face Value or Maturity Value PV factor=1/(1+r)^N Present Value 60,000,000 0.67560 PV factor up to 4 decimal places 40,536,000 B Present Value of Bond Round off 59,758,833 A+B 59,758,833 Amortisation Schedule B Interest Expense (Market rate *previous book value in G Effective Interest rate method Date Interest Payment (Coupon Rate*FV) 1-Jan-17 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19 30-Jun-20 31-Dec-20 30-Jun-21 31-Dec-21 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 2,370,000 23,700,000 2,390,353 2,391,167 2,392,014 2,392,895 2,393,811 2,394,763 2,395,753 2,396,784 2,397,855 2,395,772 23,941,167 Amortisation of Bond Debit Balance in Bond Discount [C-B] Discount Account 241,167 20,353 220,814 21,167 199,646 22,014 177,632 22,895 154,737 23,811 130,927 24,763 106,164 25,753 80,410 26,784 53,627 27,855 25,772 25,772 -O 241,167 Credit balance in bond payable account 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 Book Value of Bond 59,758,833 59,779,186 59,800,354 59,822,368 59,845,263 59,869,073 59,893,836 59,919,590 59,946,373 59,974,228 60,000,000

Answer 2 Journal Entry Credit General Journal 1-Jan-17 Cash Discount on Bond Payable Bond Payable Debit 59,758,833 241,167 60,000,000 Answer 3 2,390,353 30-Jun-17 Interest expense Discount on Bond Payable Cash 20,353 2,370,000 2,391,167 31-Dec-17 Interest expense Discount on Bond Payable Cash 21,167 2,370,000 2,392,014 30-Jun-18 Interest expense Discount on Bond Payable Cash 22,014 2,370,000 Answer 4 Interest Expense for 2017 30-Jun-17 31-Dec-17 Interest expense as of 2017 2,390,353 2,391,167 4,781,521