2. On January 1, 2015, Piper Co. issued ten-year bonds with a face value of $3,0

Question

2. On January 1, 2015, Piper Co. issued ten-year bonds with a face value of $3,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 10 periods at 10% Present value of 1 for 10 periods at 12% Present value of 1 for 20 periods at 5% Present value of 1 for 20 periods at 6% Present value of annuity for 10 periods at 10% Present value of annuity for 10 periods at 12% Present value of annuity for 20 periods at 5% Present value of annuity for 20 periods at 6% .386 .322 .377 .312 6.145 5.650 12.462 11.470 . Calculate the issue price of the bonds . Prepare all journal entries for 2016

Explanation / Answer

Issue price of bonds is:

Amortization schedule for 2015 and 2016 is:

Entries for 2016 is:

Particulars Cash flow Discount factor Discounted cash flow Interest payments-Annuity (4%,20 periods) 150,000.0 13.5903 2,038,548.95 Principle payments -Present value (4%,20 periods) 3,000,000 0.4564 1,369,160.84 A Bond price         3,407,709.79 Face value         3,000,000.00 Premium/(Discount)            407,709.79 Interest amount: Face value 3,000,000 Coupon/stated Rate of interest 10.00% Frequency of payment(once in) 6 months B Interest amount 3000000*0.1*6/12= 150000 Present value calculation: yield to maturity/Effective rate 8.00% Effective interest per period(i) 0.08*6/12= 4.000% Number of periods: Ref Particulars Amount a Number of interest payments in a year                                     2 b Years to maturiy                                10.0 c=a*b Number of periods                                   20

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