Question

On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

Present Value of 1 for 10 periods at 10% .386

Present Value of 1 for 10 periods at 12% .322

Present Value of 1 for 20 periods at 5% .377

Present Value of 1 for 20 periods at 6% .312

Present Value of annuity for 10 periods at 10% 6.145

Present Value of annuity for 10 periods at 12% 5.650

Present Value of annuity for 20 periods at 5% 12.462

Present Value of annuity for 20 periods at 12% 11.470

Instructions

a) Calculate the issue price of the bonds

b) Without prejudice to your solution in part (a) assume that the issue price was $4,420,000. Prepare the amortization table for 2018, assuming that amortization is recorded on interest payment dates using the effective interest method.

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	20
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.31200	$5,000,000.00	$1,560,000
Interest (Annuity)	11.47000	$250,000.00	$2,867,500
Price of bonds			$4,427,500

Solution b:

Bond Amortization Schedule - Effective interest method
Date	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
1-Jan-18				$580,000	$4,420,000
30-Jun-18	$250,000	$265,200	$15,200	$564,800	$4,435,200
31-Dec-18	$250,000	$266,112	$16,112	$548,688	$4,451,312