On June 30. 2016. Singleton Computers issued 8% stated rate bonds with a face am
ID: 2466598 • Letter: O
Question
On June 30. 2016. Singleton Computers issued 8% stated rate bonds with a face amount of $100 million. The bonds mature on June 30. 2031 (15 years). The market rate of interest for similar bond issues was 7% (3.5% semiannual rate). Interest is paid semiannually (4.0%) on June 30 and December 31. beginning on December 31. 2016. (FV of $1, PV of $1, FVAof $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Determine the price of the bonds on June 30. 2016. Calculate the interest expense Singleton reports in 2016 for these bonds using the effective interest method.Explanation / Answer
Solution:
1. Calculation of price of the bonds on June 30, 2016
Number of interest payment (n) = 15 x 2 = 30
Coupon Interest = 8% p.a. or 4% semi annually
Market Rate of Return = 7% p.a. or 3.5% semiannually
Price of the Bonds = Interest x PVIFA (3.5%, 30) + Maturity Value x PVIF (3.5%, 30)
= (4 x 18.392) + (100 x 0.356)
= $73.568 + $35.60
= $109.16 or $109
Present Value of Interest = $4 x 18.392 = $73.57
Present Value of Principal (Maturity Value) = $100 x 0.356 = $35.60
Price of bonds = $109.16 Million or $109 Million (rounded off)
2. Interest Expenses for 2016
Issue Price of Bonds = 109 Million
Par Value of Bonds = 100 Million
Since issue price is higher than par value, bonds are issued at premium.
Premium on Bonds Payable = $109 – 100 = 9 Million
9 Million Premium on Bonds is amortized over the life of bonds.
The amount to be amortized on each interest payment = 9 million / 30 = $300,000
Book Value of Bonds as on June 30, 2016 = $109,000,000
Interest Expenses by effective interest rate method = Book Value at beginning of the year x market Rate of return or effective interest rate
Interest Expenses on 06/30/2016 = Nil
Interest Expenses on 12/31/2016 = Book Value x Market Rate of Return = $109,000,000 x 3.5% = $381,500
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