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 | 14.80890 | = | $ 444,267 | B | |
Bond Value (A+B) | $ 992,597 |
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