Question

Sharmer Company issues 5%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following factors: n= i= Present Value of an Annuity Present value of $1 5 5 % 4.3295 0.7835 10 3 % 8.7521 0.7812 5 6 % 4.2124 0.7473 10 3 % 8.5302 0.7441

Answer 1

Answer:

$957,349

Explanation:

the market price of the bonds = PV of face value + PV of coupon payments

PV of face value = $1,000,000 / (1.03)¹⁰ = $744,094

PV of coupon payments = $25,000 x 8.5302 (PV annuity factor, 3%, 10 periods) = $213,255

market price of the bonds = $744,094 + $213,255 = $957,349

journal entry to record the issuance of the bonds:

Dr Cash 957,349

Dr Discount on bonds payable 42,651

    Cr Bonds payable 1,000,000