Question

Trew Company plans to issue bonds with a face value of $902,000 and a coupon rate of 6 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1). Determine the issuance price of the bonds assuming an annual market rate of interest of 7.5 percent.

Answer 1

Answer:

$807,992

Explanation:

issue $902,000 with a 6% semiannual coupon and 10 year maturity. coupon payment = $27,060

if the annual market interest rate = 7.5%, the bonds should be sold at a discount:

issue price = present value of face value + present value of interest payments

• present value of face value = $902,000 / (1 + 3.75%)²⁰ = $431,961
• present value of annuity = $27,060 x {1 - [1 / (1 + 3.75%)²⁰]} / 3.75% = $376,031

issue price = $431,961 + $376,031 = $807,992

the journal entry should be:

Dr Cash 807,992

Dr Discount on bonds payable 94,008

    Cr Bonds payable 902,000

Answer 2

The issuance price of the bonds is $807,992.

• The calculation is as follows:

Issue price = present value of face value + present value of interest payments

Here

Present value of face value is

= $902,000 ÷ (1 + 3.75%)^20

= $431,961

And,

The present value of annuity is

= $27,060 × {1 - [1 ÷ (1 + 3.75%)^20]} ÷ 3.75%

= $376,031

So, the issue price is

= $431,961 + $376,031

= $807,992

Therefore we can conclude that The issuance price of the bonds is $807,992.

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