Bringham Company issues bonds with a par value of $800,000 on their stated issue

Question

Bringham Company issues bonds with a par value of $800,000 on their stated issue date. The bonds mature in 10 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.

Prepare the journal entry to record the bonds’ issuance.

1- Record the issue of bonds with a par value of $800,000 for cash.

Explanation / Answer

a. Semi annual interest payment = Par Value x Semi annual coupon rate = $       8,00,000 x 3% = $           24,000 b. Number of semi annual interest payments = Life in years x Number of coupon payment in a year = 10 x 2 = 20 c. Bonds are issued at discount. Market rate on the date of issuance of bond is 8% which is more than coupon interest rate of 6%. It means Market is paying interest more than bonds.So, Bonds are issued at discount. d. Price of Bonds $    6,91,277.39 Working: Present value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.04)^-20)/0.04 i 4% =          13.59033 n 20 Present Value of 1 = (1+i)^-n = (1+0.04)^-20 =             0.45639 Present Value of coupon = $           24,000 x 13.59033 = $ 3,26,167.83 Present Value of Par Value = $       8,00,000 x     0.45639 = $ 3,65,109.56 Present Value of Cash flows = $ 6,91,277.39 Price of bond is the present value of cash flows from bond.So, price of bond is $ 6,91,277.39 e. Journal entry: Account titles and Explanation Debit Credit Cash $ 6,91,277.39 Discount on bonds payable $ 1,08,722.61 Bonds Payable $ 8,00,000.00 (To record bonds issuance at discount) Working; Par Value $ 8,00,000.00 Less Issuance of Bonds $ 6,91,277.39 Discount on Bonds Issuance $ 1,08,722.61

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