Question

Bringham Company issues bonds with a par value of $540,000 on their stated issue date. The bonds mature in 6 years and pay 9% annual interest in semi-annual payments. On the issue date, the annual market rate for the bonds is 12%.
1. What is the amount of each seml-annual Interest payment for these bonds?
2. How many semi-annual Interest payments will be made on these bonds over their Iife?
3. Use the Interest rates gven to select whether the bonds are Issued at par, at a discount, or at a premlum.
4. Compute the price of the bonds as of their issue date.
5. Prepare the Journal entry to record the bonds' Issuance.

Answer 1

Answer:

1. $24,300

2. 12

3. the bond is trading at a discount.

4. $470,090.86

5. Journal Entry

Cash $470,090.86 (debit)

Bond Payable $470,090.86 (credit)

Explanation:

1. seml-annual Interest payment

Seml-annual Interest payment = ($540,000 × 9 %) ÷ 2

                                                  = $24,300

2. Number of seml-annual Interest payment

Number of seml-annual Interest payment = 6 years × 2

                                                                     = 12

3. Issue

The annual market rate for the bonds (YTM) ,  12% is greater than the coupon rate of the bond 9%.

The Price will be less than the par value and we say that the bond is trading at a discount.

4. Computation of the Issue Price, PV

PMT = $24,300

n = 12

YTM = 12 %

FV = $540,000

p/yr = 2

PV = ?

Using a Financial Calculator, the Issue Price, PV is $470,090.86

5. Journal Entry

Cash $470,090.86 (debit)

Bond Payable $470,090.86 (credit)