PowerTap Utilities is planning to issue bonds with a face value of $2,500,000 an

Question

PowerTap Utilities is planning to issue bonds with a face value of $2,500,000 and a coupon rate of 10 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. PowerTap uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)  

1. What was the issue price on January 1 of this year? (Round your final answer to whole dollars.)

2. What amount of interest expense should be recorded on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

3. What amount of cash should be paid to investors June 30 and December 31 of this year?

4. What is the book value of the bonds on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

Explanation / Answer

1) Assumption: Face Value is $100.

2) Amount entered in the books for bonds = 88.53 x 25000 = 2213250

Amount of Interest for June 30 (6m) = 2213250 x 6% = 132795

Amount of Interest for Dec 31 (6m) = (2213250+132795-125000) x 6% = 133263

3) Interest paid to investors in cash on June 30 and December 31 = 125000 each half year  

4) Book value of Bonds on June 30 = 2213250+132795-125000 = 2221045

Book value of Bonds on Dec 31 = 2221045+133263-125000 = 2229308

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