Question

Recording and Reporting Bonds Issued at a Premium (AP1 0-6) Cron Corporation is planning to issue bonds with a face value of $700,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent Required: 1. What was the issue price on January 1 of this year? 2. What amount of interest expense should be recorded on June 30 and December 31 of this year? 3. What amount of cash should be paid to investors June 30 and December 31 of this year? 4. What is the book value of the bonds on June 30 and December 31 of this year?

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	10
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.55839	$700,000.00	$390,876
Interest (Annuity)	7.36009	$45,500.00	$334,884
Bond Price			$725,760

Solution 2-4:

Bond Amortization Schedule - Effective interest method
Date	Cash Paid to investor	Interest Expense	Premium Amortized	Unamortized Premium	Book value of bond
Year 1, Jan1				$25,760	$725,760
Year 1, Jun 30	$45,500	$43,546	$1,954	$23,806	$723,806
Year 1, Dec 31	$45,500	$43,428	$2,072	$21,734	$721,734