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Chapter 12: Q14SE (page 658)

Determining the present value of bond at issuance

On December 31, 2018, when the market interest rate is 12%, Benson Realty issues

$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.

Determine the present value of the bonds at issuance.

Short Answer

Expert verified

The present value of the bond as issuance is $505,493

Step by step solution

01

Definition of cash flow

The cash flow the inflow and outflow of the cash and other items which are equivalent to the cash during a period.

02

Present value of the bonds at issuance

Present value of principal:

笔谤别蝉别苍迟鈥塚补濒耻别=鈥塅耻迟耻谤别鈥塚补濒耻别脳鈥塒痴鈥塮补肠迟辞谤鈥塷蹿鈥塱=6%,鈥塶=20=$600,000脳鈥�0.312=$187,200鈥�

Present value of interest:

笔谤别蝉别苍迟鈥塚补濒耻别=鈥碱尘辞耻苍迟鈥塷蹿鈥塭补肠丑鈥塩补蝉丑鈥塮濒辞飞鈥夆赌壝椻赌碱苍苍耻颈迟测鈥夆赌塒痴鈥塮补肠迟辞谤鈥塷蹿鈥塱=6%,鈥塶=20=$27,750脳鈥�11.470=$318,293鈥�

Present value at issuance:

笔谤别蝉别苍迟鈥塚补濒耻别=鈥塒谤别蝉别苍迟鈥夆赌塚补濒耻别鈥夆赌塷蹿鈥夆赌塒谤颈苍肠颈辫补濒+鈥塒谤别蝉别苍迟鈥夆赌塚补濒耻别鈥夆赌塷蹿鈥塈苍迟别谤别蝉迟=鈥�$187,200+鈥�$318,293=鈥�$505,493

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Most popular questions from this chapter

Computing the debt to equity ratio

Ludwig Corporation has the following data as of December 31, 2018:

Total Current Liabilities \( 36,210 Total Stockholders鈥� Equity \) ?

Total Current Assets 58,200 Other Assets 36,800

Long-term Liabilities 139,630 Property, Plant, and Equipment, Net 206,440

Compute the debt to equity ratio at December 31, 2018.

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodBrad Nelson, Inc. issued \(600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interestsemiannually.

Learning Objectives 2, 3, 4

3. June 30, 2018, InterestExpense \)25,200

Learning Objectives 2, 3, 4

June 30, 2018, Interest Expense$37,750

C H A P T E R 1 2

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Reporting liabilities

At December 31, MediStat Precision Instruments owes \(52,000 on Accounts

Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat

also has \)300,000 of Bonds Payable that were issued at face value that require

payment of a \(35,000 installment next year and the remainder in later years. The

bonds payable require an annual interest payment of \)4,000, and MediStat still

owes this interest for the current year. Report MediStat鈥檚 liabilities on its classified

balance sheet on December 31, 2018.

Computing the debt to equity ratio

Jackson Corporation has the following amounts as of December 31, 2018.

Total assets $ 55,250

Total liabilities 22,750

Total equity 32,500

Compute the debt to equity ratio on December 31, 2018.

When a bond is issued, what is its present value?
See all solutions

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