To determine Calculate the issuance price of the bonds. Explanation Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations. Bond Premium: It occurs when the bonds are issued at a high price than the face value. Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate. Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value. Determine the issuance price of the bonds. Step 1: Calculate the cash interest payment for bonds. Cash interest payment = Face value × Coupon rate × Interest time period = $ 500 , 000 × 10 % × 1 2 = $ 25 , 000 Step 2: Calculate the present value of cash interest payment. Particulars Amount Interest payment (a) $25,000 PV factor at annual market interest rate of 4% for 20 periods (b) 13.59033 Present value ( a ) × ( b ) $339,758 Table (1) Note: The present value factor for 20 periods at 4% interest would be 13

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ISBN: 9781260918373

Author: Libby

Publisher: INTER MCG

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Chapter 10, Problem 8ME

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Calculate the issuance price of the bonds.

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