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Chapter 12: 7TI (page 645)

On December 31, 2018, when the market interest rate is 8%, Arnold Corporation issues $200,000 of 6%, 10 year-bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance.

Short Answer

Expert verified

the present value of the bonds at issuance is $216,652.

Step by step solution

01

Definition of the bonds

A bond is a type of long-Term liability that the company issues to fulfill its money needs.

02

Present value of bonds

To find the pesent of the bonds, first of all, the present value of the principal is calculated

PresentValueofPrincipal=Value脳PVfactorofi=4%,n=20=$200,00脳0.67556=$135,112

Hence, the present value of the principal is $135,112

PresentValueofInterest=Value脳SemiannualInterestRate脳PVfactorPVA,i=4%,n=20=$200,000脳3%脳13.59=$81,540

Hence, the present value of the principal is $81,540

Now the present value of the bonds is calculated by adding the present value of principal and interest

PresentValueofBonds=PVofPrincipal+PVofInterest=$135,112+$81,540=$216,652

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Most popular questions from this chapter

Explain each of the key factors that the time value of money depends on.

What are the two categories of liabilities reported on the balance sheet? Provide

examples of each.

What is an amortization schedule?

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Journalizing bond transactions including retirement at maturity

McQueen Company issued a $100,000, 7.5%, 10-year bond payable. Journalize

the following

transactions for McQueen Company, and include an explanation for each

entry:

a. Issuance of the bond payable at face value on January 1, 2018.

b. Payment of semiannual cash interest on July 1, 2018.

c. Payment of the bond payable at maturity, assuming the last interest

payment had

already been recorded. (Give the date.)
See all solutions

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