Question

On July 1, 20X1, Mirage Company issued $250 million of bonds with an 8% coupon interest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on July 1, 20X1, for bonds of this risk class was 8%. Mirage closes its books on December 31. Ignore income taxes.
Required:
a. At what price were the bonds issued?
b. On July 1, 2019, the market interest rate for bonds of this risk class is 6%. What is the fair value of the bonds on this date?
c. Suppose that 50% of the bonds were repurchased for cash on July 1, 2019, at the market price. What journal entry would the company make to record this partial retirement?

Answer 1

Answer: See explanation

Explanation:

a. At what price were the bonds issued?

The bonds were issued at $250 million since the issue price will have thesame value as the face value in this case.

b. On July 1, 2019, the market interest rate for bonds of this risk class is 6%. What is the fair value of the bonds on this date?

The fair value of the bond on this date will be:

= {$250,000,000 × 4% × [(1-1.03)^-16]0.03} + {$250,000,000 × (1/1.03)^-16}

= $281402755

c. Suppose that 50% of the bonds were repurchased for cash on July 1, 2019, at the market price. What journal entry would the company make to record this partial retirement?

The journal entry will be:

July 1 ,2019

Debit Bond payable $250,000,000/2 = $125,000,000

Debit loss on bond redemption = $140,701,378 - $125,000,000 = $15,701,378

Credit Cash $281402755 × 50% = $140,701,378

(To record bond payable redemption)