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Rubotics Corporation issued $1,000,000 of 6

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Rubotics Corporation issued $1,000,000 of 6.5%, 8-year bonds dated June 30, 20X5, with semiannual interest payments on December 31 and June 30. The bonds were issued on June 30, 20X5, for $1,033,750, Rubotics Corporation's year-end is December 31.

a) Were the bonds issued at a premium, a discount: or at par?
b) Was the market rate of interest higher, lower, or the same as the contract rate of interest?
c) If the company uses the straight-line method of amortization, what is the amount of interest expense Rubotics Corporation will show
for the year ended December31, 20X5 (round to the nearest dollar)
d) What is the carrying value of the bonds on December 31, 20X5?

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Rubotics Corporation issued $1,000,000 of 6.5%, 8-year bonds dated June 30, 20X5, with semiannual interest payments on December 31 and June 30.The bonds were issued on June 30, 20X5, for $1,033,750, Rubotics Corporation's year-end is December 31.

a) Were the bonds issued at a premium, a discount: or at par?

The bonds are issued at a premium because the issued price of $1,033,750 is higher than the face value of $1,000,000.

b) Was the market rate of interest higher, lower, or the same as the contract rate of interest?

If the bonds are sold at a premium or above par value, it means the market rate of interest is lower than the contract rate of interest. The investors would prefer to buy the bonds that provide higher coupon rates and willing to pay higher to obtain its higher coupons.

c) If the company uses the straight-line method of amortization, what is the amount of interest expense Rubotics Corporation will show for the year ended December31, 20X5 (round to the nearest dollar)

Amount received at issuance $1,033,750
Amount to be repaid at maturity $1,000,000
Excess of cash received over cash paid ($ 33,750)
Cash interest payments (32500 x 2 x 8 years) $ 520,000
Total Interest cost $ 486,250

Interest expense on December 31, 20X5 is

$486,250/16 = $30,391

d) What is the carrying value of the bonds on December 31, 20X5?

Premium on bonds payable on December 31, 20X5 is

$33,750/16 = $2,110

Then, you have to deduct the premium amortization from the issued price as follows: -

$1,033,750 - $2,110 = $1,031,640

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