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Chapter 12: Q30E_2 (page 662)

Determining the present value of bonds payable

Interest rates determine the present value of future amounts. (Round to the nearest

dollar.)

Requirements

1. Determine the present value of 10-year bonds payable with face value of $86,000

and stated interest rate of 14%, paid semiannually. The market rate of interest is

14% at issuance.

2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.

3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.

Short Answer

Expert verified

The present value of the bonds is $95,864

Step by step solution

01

Definition Face value

Face value is the stated amount of the bond. Face value also known as the par value as this value is the value mentioned on the bond.

02

Calculation of the present value of bonds

In this, we take n= 20 and i=7%

PresentValue=FutureValue×PVfactorofi=6%,n=20=$86,000×0.31180=$26,815

Present value of interest:

PresentValue=Amountofcashflow×AnnuityPVfactor=$6,020×11.4699=$69,049

Present Value of bonds

PresentValue=PresentValueofprincipal+PresentValueofinterest=$26,815+$69,049=$95,864

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Most popular questions from this chapter

Reporting current and long-term liabilities

Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial

bond payable that must be paid in three equal annual installments plus interest for the

year. The first payment of principal and interest comes due January 2, 2019. Complete

the missing information. Assume the bonds are issued at face value.

December 31

2018 2019 2020

Current Liabilities:

Bonds Payable \) \( \)

Interest Payable

Long-term Liabilities:

Bonds Payable

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Bond prices depend on the market rate of interest, stated rate of interest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?

Explain your answer.

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.

Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.

6. Journalize the issuance of the bonds payable on January 1, 2018.

7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line

amortization method) on July 1, 2018.

8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the

first semiannual interest and amortization of the bond discount or premium.
See all solutions

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