Question

Bringham Company issues bonds with a par value of $800,000 on their stated issue date. The bonds mature in 10 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%.

1. What is the amount of each semiannual interest payment for these bonds?

2. How many semiannual interest payments will be made on these bonds over their life?

3. Use the interest rates given to determine whether the bonds are issued at par, at a discount, or at a premium.

4. Compute the price of the bonds as of their issue date.

5. Prepare the journal entry to record the bonds’ issuance

Short answer

(1) Semi-annual interest payment equals $24,000.

(2) Total semi-annual interest payments are 20.

(3) Issued at discount

(4) Issue price of bonds equals $691,287.

(5) Cash account will be debited by $691,287, discount on bonds payable account will be debited $108,713 , and bonds payable will be credited $800,000.

Step-by-step solution

:Calculation of semi-annual interest payment

$\begin{array}{rcl}\mathbf{Semi}\mathbf{-}\mathbf{annual}\mathbf{}\mathbf{Interest}& \mathbf{=}& \mathbf{Par}\mathbf{}\mathbf{value}\mathbf{\times }\frac{\mathbf{Coupon}\mathbf{}\mathbf{rate}}{\mathbf{2}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{800}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{6}\mathbf{\%}}{\mathbf{2}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000}\\ & & \end{array}$

:Number of semi-annual interest payment

$\begin{array}{rcl}\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{semi}\mathbf{-}\mathbf{annual}\mathbf{}\mathbf{interest}\mathbf{}\mathbf{payments}& \mathbf{=}& \mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{years}\mathbf{\times }\mathbf{Semi}\mathbf{-}\mathbf{annual}\mathbf{}\mathbf{periods}\mathbf{}\mathbf{peryear}\\ & \mathbf{=}& \mathbf{10}\mathbf{\times }\mathbf{2}\\ & \mathbf{=}& \mathbf{20}\\ & & \end{array}$

Based on Interest rate is Bond are at par or discount or at Premium

Bond Price at discount = Contract rate < Market rate.

As the contract rate of 6% is Less than the Market rate of 8%, hence bonds are issued at discount

:Calculation of bonds’ Issue price using Present value table

Cash Flow	Table	Present value factor	Amount	Present Value
$800,000 par (maturity) value	B.1 (PV of 1)	0.4564	$ 800,000	$ 365,120
$24,000 interest payments	B.3 (PV of ann.)	13.5903	$ 24,000	$ 326,167
Bond Issue Price				$691,287

:Journal entry to record the bonds’ issuance

Date	Account and explanation	Debit	Credit
	Cash	$691,287
	Discount on Bonds Payable	$108,713
	Bonds Payable		$800,000
	Sold bonds for cash at a discount on their issue date.