Bringham Company issues bonds with a par value of $550,000 on their stated issue

Question

Bringham Company issues bonds with a par value of $550,000 on their stated issue date. The bonds mature in 7 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (TableB1, Table B.2, Table B3, 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 Complete this question by entering your answers in the tabs below Req 1 to 3 Req 4 Req 5 What is the amount of each semiannual interest payment for these bonds? How many semiannual interest payments will be made on these bonds over their life? Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium Semiannual Rate Semiannual cash interest payment Par (maturity) value Number of payments Whether the bonds are issued at par, at a discount, or at a premium? Req 1 to 3 Req 4

Explanation / Answer

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

550000

Market Rate

8%

4%

Term (in years)

7

Coupon Rate

6%

3%

Total no. of interest payments

14

Bond Face Value

Market Interest rate (applicable for period/term)

PV of

$     550,000.00

at

4.0%

Interest rate for

14

term payments

PV of $1

0.577475083

PV of

$   550,000.00

=

$ 550,000.00

x

0.577475083

=

$       317,611.30

A

Interest payable per term

at

3.0%

on

$ 550,000.00

Interest payable per term

$    16,500.00

PVAF of 1$

for

4.0%

Interest rate for

14

term payments

PVAF of 1$

10.56312293

PV of Interest payments

=

$ 16,500.00

x

10.56312293

=

$       174,291.53

B

Bond Value (A+B)

$       491,902.82

Bond Amortization Schedule

Period

Cash payment

Interest expense

Premium on Bonds payable

Carrying Value of Bond

Year 1

$    58,097

$   491,903

1st half

$     16,500

$ 19,676

$      3,176

$   495,079

2nd half

$     16,500

$ 19,803

$      3,303

$   498,382

Year 2

1st half

$     16,500

$ 19,935

$      3,435

$   501,817

2nd half

$     16,500

$ 20,073

$      3,573

$   505,390

Answers

Requirement 1

Semiannual interest amount =$16,500

Requirement 2

Number of semiannual interests =14

(7x2)=14

Requirement 3

Bonds will be issued at Discount since market value is higher than coupon rate.

Requirement 4

Price of the bond at the time of issue

Price of bond= $ 491,902.82

Requirement 5

Journal entry for issue of bond

Accounts titles

Debit

Credit

Cash

$ 491,903

Discount on Bonds Payable

$       58,097

               Bonds payable

$ 550,000

(Issue of bond)

Note

Answer may vary due to rounding off

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.

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