lse 14-34 Bringham Company issues bonds with a par value of $800,000 on their st

Question

lse 14-34 Bringham Company issues bonds with a par value of $800,000 on their stated issue date. The bod m ture in 10 years and pay 6% annual interest in semiannual payments. On the issue date, the annual rate for the bonds is 8%. bond interest rice, recording 1. What is the amount of each semiannual interest payment for these bonds? 2. How many semiannual interest payments will be made on these bonds over their life? 3. Use the interest rates given to determine whether the bonds are issued at par, at a discount,a premium 4. Compute the price of the bonds as of their issue date. s. Prepare the journal entry to record the bonds issuance.

Explanation / Answer

Q1. Semi annual Interest payment:

Bonds amount: $800,000

Rate of Interest: 6%

Semi-Annual interest: $ 800,000 *6% *6/12 = $24,000

Q2. Number of Semi annual interest payment to be made is : 20 (i.e. 2 payment in each year for 10 years)

Q3.

As the market rate of interest is 8% and stated rate of interest is 6%, the bonds shall be issued at discount. This is due to the fact that as investors are getting the lower interest rate than market rate, they will be forego such interest only when they are getting the instrument at discount.

Q4.

Issue Price: Present value of Interestt payment for 20 periods (i.e. $24000 for Annuity of 4% for 20 years i.e. 13.5903) 326167 Add: Present value of Bonds at matutiry ($ 800,000 *PVF of 20 periiod i.e. 0.4564) 365120 ISSUE PRICE OF BONDS 691287 Q5. Journal entry: Cash Account Ddr. 691287 Discount on Bonds payable (800,000-691287) 108713         Bonds payable 800,000

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