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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:

Present Value= Future Value× PV factor of i=6%, n=20=$600,000× 0.312=$187,200 

Present value of interest:

Present Value= Amount of each cash flow  × Annuity  PV factor of i=6%, n=20=$27,750× 11.470=$318,293 

Present value at issuance:

Present Value= Present  Value  of  Principal+ Present  Value  of Interest= $187,200+ $318,293= $505,493

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Most popular questions from this chapter

S12A-13 Determining present value

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

  1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Preparing an amortization schedule and recording mortgages payable

entries

Kellerman Company purchased a building and land with a fair market value of

\(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman

signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of

\)3,940.37. Round to two decimal places. Explanations are not required for journal

entries.

Requirements

1. Journalize the mortgage payable issuance on January 1, 2018.

2. Prepare an amortization schedule for the first two payments.

3. Journalize the first payment on January 31, 2018.

4. Journalize the second payment on February 28, 2018.

What is the carrying amount of a bond?

Determining the present value of bonds payable and journalizing using the effective-interest amortization method

Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest rate at the date of issuance was 10%, and the bonds pay interest semiannually.

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 second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.

Herrera Corporation issued a $400,000, 4.5%, 10-year bond payable on January 1, 2018. Journalize the payment of the bond

payable at maturity. (Give the date.)
See all solutions

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