Tos Recording and Reporting Bonds Issued at a Premium LOTO- The following inform

Question

Tos Recording and Reporting Bonds Issued at a Premium LOTO- The following information applies to the questions displayed below. Cron Corporation is planning to issue bonds with a face value of $820,000 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.)

Explanation / Answer

1.the following the calculation of issue price

[present value of annuity * interest payment] + [present value factor * face value]

here,

present value of annuity factor = [1 - (1+r)^n]/r

here,

r = 12 % per annum =>6% for 6 months =>0.06.

n = 5 years* 2 semi annual periods =>10 semi annual periods

now,

[1 -(1.06)^(-10)]/0.06

=>0.4416052/0.06.

=>7.36008667.

interest payment = $820,000 * 13% *6/12 =>$53,300

present value factor = 1 /(1+r)^n =>1 /(1.06)^10 =>0.55839478.

face value = $820,000.

now,

issue price of bond = [7.36008667 * $53,300] +[0.55839478 *$820,000]

=>[$392,292.619511] + [457,883.7196]

$850,176.....(rounded to nearest dollar).

2.

note:

interest expense on june 30 => amount outstanding * effective rate*6/12

=>$850176 * 12% *6/12

=>$51,010..(rounded off)

interest expense on december 31

first face value on december 31=>issue price - (interest payment on june 30 - intrest expense on june 30)

=>$850,176 - (53,300 - 51,010)

=>$847,886.

now, interest expense on december 31= $847,886 * 12% *6/12

=>$50,873.

June 30 December 31 Interest expense $51,010 $50,873

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