Bonds payable are dated January 1, 2016, and are issued on that date. The face v
ID: 1174627 • Letter: B
Question
Bonds payable are dated January 1, 2016, and are issued on that date. The face value of the bonds is $200,000, and the face rate of interest is 8%. The bonds pay interest semiannually. The bonds will mature in five years. The market rate of interest at the time of issuance was 6%.
Use the appropriate present or future value table:
FV of $1, PV of $1, FV of Annuity of $1 and PV of Annuity of $1
1. What is the bond issuance price? Round your answers to two decimal places.
$
2. Using the effective interest amortization method, what amount should be amortized for the first six-month period? What amount of interest expense should be reported for the first six-month period? Round your answers to two decimal places.
3. Using the effective interest amortization method, what amount should be amortized for the period from July 1 to December 31, 2016? What amount of interest expense should be reported for the period from July 1 to December 31, 2016? Round your answers to two decimal places.
Amount amortized $ Amount of interest expense $Explanation / Answer
1) Bond issuance price $ 2,17,060.41 Working: a. Par Value 2,00,000 b. Semi annual coupon interest = 2,00,000 x 4% = 8,000 c. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.03)^-10)/0.03 i 0.03 = 8.5302 n 10 d. Present Value of 1 = (1+i)^-n = (1+0.03)^-10 = 0.74409 e. Present Value of coupon 8,000 x 8.5302 = 68,241.62 Present Value of Par Value 2,00,000 x 0.7441 = 1,48,818.78 Present Value of cash flows 2,17,060.41 Price of bond is the present value of cash flows.So, price of bond is 2,17,060.41 2) Amount amortized $ 1,488.19 Amount of interest expense $ 6,511.81 3) Amount amortized $ 1,532.83 Amount of interest expense $ 6,467.17 Working: Amortization table: Date Coupon Interest Interest Expense Premium amortization Carrying Value January 1, 2016 2,17,060.41 June 30, 2016 8,000.00 6,511.81 1,488.19 2,15,572.22 December 31, 2016 8,000.00 6,467.17 1,532.83 2,14,039.38
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