Exercise 14-3 Computing bond interest and price; recording bond issuance LO P2 B

Question

Exercise 14-3 Computing bond interest and price; recording bond issuance LO P2

Bringham Company issues bonds with a par value of $500,000 on their stated issue date. The bonds mature in 8 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

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.

Compute the price of the bonds as of their issue date. (Round all table values to 4 decimal places, and use the rounded table values in calculations Round intermediate calculations to the nearest dollar amount.)

Prepare the journal entry to record the bonds’ issuance. (Round intermediate calculations to the nearest dollar amount.)

Bringham Company issues bonds with a par value of $500,000 on their stated issue date. The bonds mature in 8 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

1.Semi Annual Payment ( C=Coupon payment)=$500,000 x 6% x 6/12=$15,000

2.No of Interest payments ( n= periods) = 2 times a year x 8 years=16

3.bond selling at Disount

4. Bond Price=C x [1-{1/(1+i)n}]/i + M/(1+i)n

                           =15,000 x [1-{1/(1+0.04)16]/0.04 + 500,000/(1+0.04)16

                   =15,000 x [1-{1/ 1.8729812}/0.04 +500,000/1.8729812

                        =15,000 x [1-0.5339082]/0.04 + 266,954.09

                        =15,000 x {0.46609182/0.04} +266,954.09

                           =15,000 x 11.6523+266,954.09

                          =$ 174,784.43 +$266,954.09

                           = $441,738.52

5. Dr Cash                                            441,738.52

Dr Discount on Bonds payable 58,261.48

      Cr Bonds Payable                                                     500,000

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