Bonds issued at a premium On January 1, 2018, Splash City issues $470,000 of 9%
ID: 2570881 • Letter: B
Question
Bonds issued at a premium On January 1, 2018, Splash City issues $470,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $516,513. Compute carrying value on June 30, 2018. Omit the "$" sign in your response. Add commas for a number in input field while typing. Please enter in this format only: xxx,xxx Hint: Cash paid = Face amount × 4.5% Stated rate Interest expense = Carrying value × 4.0% Market rate
Explanation / Answer
the follwing extract of amortization table will help us identifying the carrying amount of bonds:
note: since interet is paid semi annually , the interst rate for calcualting interest expense and payment will be 4% and 4.5% respectively.
The excess of interest paid in cash over the interest expense should be reduced from the opening bond balance to arrive at the closing balance of the bonds.
therefore the carrying value of the bond on June 30,2018 =>$516,023.52.
opening value of bonds interest expense @4% of bond value interest paymet @4.5%*face value (int expense - int paid) Closing value of bonds $516,513 $516,513*4% =>$20,660.52 $470,000*4.5%=>$21,150 (21,150 -20,660.52)=>$489.48 $516,513 - 489.48=>516,023.52