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Chapter 12: Q5SE_1 (page 656)

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payableat 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

Short Answer

Expert verified

Answer:

The amount received by Savvy on the issue is $3,482,500.

Step by step solution

01

Definition of interest

Interest is the amount paid by the company to the investors or creditors againstusing their money for given period.

02

Amount receive on the issue of bonds

In this, bonds are issued at a discount

PriceofBonds=Facevalueofbond×rate=$3,500,000×99.50%=$3,482,500

Hence, the cash received by Savvy when it issued money is $3,482,500.

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Most popular questions from this chapter

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.)

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?

How does compound interest differ from simple interest?

What type of account is Discount on Bonds Payable? What is its average balance? Is it added to or subtracted from the Bonds Payable charge to determine the carrying amount?

When a bond is issued, what is its present value?
See all solutions

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