Question

Citywide Company issues bonds with a par value of $80,000 on their stated issue date. The bonds mature in six years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.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.

Answer 1

(1)-The amount of each semiannual interest payment for these bonds

The amount of each semiannual interest payment = Face Value of the Bond x Annual Coupon Rate x ½

= $80,000 x 10% x ½

= $4,000 per each semi-annual period

(2)-Number of semiannual interest payments will be made on these bonds over their life

Number of semi-annual payments = Maturity period of the Bond x 2

= 6 Years x 2

= 12 Semi-annual interest payments.

“Therefore, 12 Semi-annual interest payments of $4,000 will be made on these bonds over their life

(3)-Whether the bonds are issued at par, at a discount, or at a premium.

Here, the market rate for the bonds (8%) is less than the coupon rate of the Bond (10%), therefore, the Bond is issued at PREMIUM.

(4)-Price of the bonds as of their issue date

The Price of the is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $80,000

Semi-annual Coupon Amount = $4,000 [$80,000 x 10% x ½]

Semi-annual Yield to Maturity = 4% [8% x ½]

Maturity Period = 12 Years [6 Years x 2]

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $4,000[PVIFA 4%, 12 Years] + $80,000[PVIF 4%, 12 Years]

= [$4,000 x 9.3851] + [$80,000 x 0.6246]

= $37,540 + $49,968

= $87,508

“Therefore, the Price of the Bond = $87,508”

(5)-Journal entry to record the bonds’ issuance

General Journal	Debit ($)	Credit ($)
Cash A/c	87,508
To Premium on Bond Payable A/c		7,508
To Bond Payable A/c		80,000
[Journal Entry to record the Issuance of Bond]

Face Value of the Bond = $80,000

Issue Price of the Bond = $87,508

Premium on Bond Payable = Issue Price of the Bond – Face Value of the Bond

= $87,508 - $80,000

= $7,508