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Chapter 12: Q30E_3 (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 $77,557

Step by step solution

01

Definition of interest rate

A interest rate is the rate at which company pays the sum of money to the bondholder for using the money provided by them.

02

Calculation of the present value of bonds

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

PresentsValue=FutureValue×PVfactorofi=8%,n=20=$86,000×0.21455=$18,452

Present value of interest:

PresentsValue=Amountofcashflow×AnnuityPVfactor=$6,020×9.8181=$59,105

Present Value of bonds

PresentsValue=PresentValueofprincipal+PresentValurofinterest=$18,452+$59,105=$77,557

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Most popular questions from this chapter

Explain each of the key factors that the time value of money depends on.

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.

What is the difference betwee the stated interest rate and the market interest rate?

Reporting liabilities

At December 31, MediStat Precision Instruments owes \(52,000 on Accounts

Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat

also has \)300,000 of Bonds Payable that were issued at face value that require

payment of a \(35,000 installment next year and the remainder in later years. The

bonds payable require an annual interest payment of \)4,000, and MediStat still

owes this interest for the current year. Report MediStat’s liabilities on its classified

balance sheet on December 31, 2018.

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%.
See all solutions

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