On June 30 of the current year, Rural Gas & Electric Co. issued $50,000,000 face
ID: 2380370 • Letter: O
Question
On June 30 of the current year, Rural Gas & Electric Co. issued $50,000,000 face value, 9 percent, 10-year bonds payable, with interest dates of December 31 and June 30. The bonds were issued at a discount, resulting in an effective semiannual interest rate of 5 percent.
a.
Compute the issue price for the bond that results in an effective semiannual interest rate of 5 percent. (Hint: Discount both the interest payments and the maturity value over 20 semiannual periods.) (Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
b.
Prepare a journal entry to record the issuance of the bonds at the sales price you computed in parta.(Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
c. Why were the bonds issued at a discount?
On June 30 of the current year, Rural Gas & Electric Co. issued $50,000,000 face value, 9 percent, 10-year bonds payable, with interest dates of December 31 and June 30. The bonds were issued at a discount, resulting in an effective semiannual interest rate of 5 percent.
a.
Compute the issue price for the bond that results in an effective semiannual interest rate of 5 percent. (Hint: Discount both the interest payments and the maturity value over 20 semiannual periods.) (Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
b.
Prepare a journal entry to record the issuance of the bonds at the sales price you computed in parta.(Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
c. Why were the bonds issued at a discount?
Explanation / Answer
a compute the issue price for the Bond that results in an effective semiaannual interest rate of 5%
We have Par Value = FV = 50,000,000
No of period = nper = 10Yr*2 period/Tr = 20
Coupon = 9% Semi. So PMT = 9%*50,000,000/2 = 2250000
Effective Semi Annual Int = Rate =5%
So Issue price = PV(Rate,nper,pmt,fv)
= PV(5%,20,2250000,50000000)
= $46,884,447.41
rounde off to $46,884,447
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b. prepare a journal entry to record the issuance of the bonds at the sales price you computed in part a
30Jun Cash Dr $46,884,447
Discount on Bond Payable Dr $3,115,553
Bond Payable A/C Cr 50,000,000
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c. explain why the bonds were issued at a discount
Bonds are issued at discount when its coupon yield is Less than the market yield. When its yield is Less than the market yield, the bond price will have to be sold at a discount to ensure the price is fair among all the securities traded after risk-adjusted and to avoid arbitrage opportunity.
In given case, we see that Coupon yield is 9% while Mkt yield is 5%*2=10%.------------ Bond is issued at Discount.
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