Question

Please calculate and explain

Use the following information for the next 3 questions:
On 1/1/17, a company issues a $100,000 face value bond with an 8% stated rate maturing on 1/1/27. At issuance, the market rate is 11%. Interest is paid semiannually on 7/1 and 1/1 beginning 7/1/17.

9. What is the amount of the selling price of this bond?
A. $60,727
B. $100,000
C. $82,075
D. $126,883
10. Under the effective interest method, what will happen on 12/31/17 when the company prepares its financial statements?
A. Interest Expense will be debited for $4,000
B. The carrying value will be $82,074
C. The carrying value will be $82,588
D. Discount on Bonds Payable will be credited for $542

12. Assume the company called the bond on 1/1/24 at 99 and that the unamortized Discount is $3,758. Which of the following is incorrect?
A. Credit Cash for $99,000
B. Debit Gain on Redemption of Bonds Payable for $2,758
C. Credit Discount on Bonds Payable for $3,758
D. Debit Bonds Payable for $100,000

Answer 1

9. Present value of principal = $100,000 * 11% pvaf in year 10

= $100,000 * 0.352

= $35,200

Present value of interest payments = $100,000 * 8% * 11% pvaf for 10 years

= $100,000 * 8% * 5.889

= $47,112

Selling price of the bond = Present value of principal + Present value of interest payments

= $35,200 + $47,112

= $82,312

The answer is C. (the difference is due to decimal differences)

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10.

Period	Effective interest at 5.5% of carrying value	Interest paid at 4% of $100,000	Plug for premium amortization	Carrying value
				$82,075
1	$82,075*5.5% = $4,514	$4,000	$514	$82,589
2	$82,589*5.5% = $4,542	$4,000	$542	$83,131

The answer is D.

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12.

Bonds payable	$100,000
Loss on redemption of bonds payable	$2,758
Discount on bonds payable		$3,758
Cash ($100,000*$99/$100)		$99,000

There is loss and not gain on the redemption of bonds payable

The answer is B.