July 1 2015, a company issued $400,000 of 10 years, 9% bonds at 98. Interest on

Question

July 1 2015, a company issued $400,000 of 10 years, 9% bonds at 98. Interest on bonds is able on June 30 and December 31 of each year. 1. What is the par value of the bonds issued by Fox Corporation? 2. were these bonds issued at a premium or a discount?

3. on the date the bonds are issued, is the contract rate of interest greater than or less than the market rate of interest?

4. How much cash was received when the bonds were issued?

5. How much interest should be paid to bondholders on December 31 2015? 6. what amount of discount or premium would be amortized with the first interest payment on December 31 2015? Assume uses the straight line Method 7. What amount of interest expense would the company report on the 2015 income statement related to these bonds? 8. What would be the carrying value of the bonds on the company Dec 31, 2015 balance sheet?

Explanation / Answer

1) Par Vaue of Bond issued = $400000

2) Bonds are issued at discount.

Issued Price = (400000/100)*98 = 392000

Discount Price = 400000 - 392000 = 8000

3) Contract rate of interest is 9% and market rate of interest must be higher than contract rate because bond has been at discount.

4) Cash received on issuance of Bond = (400000/100)*98 = 392000

5) Interest to be paid on December 31, 2015 = 400000*9%*1/2 = 18000

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