Question

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Cron Corporation is planning to issue bonds with a face value of $700,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Required:

1. What was the issue price on January 1 of this year? (Round your final answers to nearest whole dollar amount.)

2. What amount of interest expense should be recorded on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

4. What is the book value of the bonds on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	10
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.55839	$700,000.00	$390,873
Interest (Annuity)	7.36009	$45,500.00	$334,884
Price of bonds			$725,757

Solution 2:

Bond Amortization Schedule (Partial)
Period	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
Year 1, Jan 1				$25,757	$725,757
Year 1, Jun 30	$45,500	$43,545	$1,955	$23,802	$723,802
Year 1, Dec 31	$45,500	$43,428	$2,072	$21,731	$721,731

Interest expense to be recorded on June 30 of this year = $43,545

Interest expense to be recorded on Dec 31 of this year = $43,428

Solution 4:

Book value of bond on June 30 of this year = $723,802

Book value of bond on Dec 31 of this year = $721,731