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Homework answers / question archive / The Bradford Company issued 8% bonds, dated January 1, with a face amount of $60 million on January 1, 2021 to Saxton-Bose Corporation
The Bradford Company issued 8% bonds, dated January 1, with a face amount of $60 million on January 1, 2021 to Saxton-Bose Corporation. The bonds mature on December 31, 2030 (15 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.(F‘.,f PV of $1 FVA of $1, PVA of $1, FVAD of $1 and PVAD of $j)
Required: 1. to 3. Prepare the journal entries to record the purchase of the bonds by Saxton-Bose on January 1, 2021, interest revenue on June 30, 2021 and interest revenue on December 31, 2021 (at the effective rate). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry equired" in the first account field.)
Workings:
Present Value of Bond = Present Value of Interest + Present Value of Principal
Here,
Present Value of Interest = $60,000,000 *8% * (6/12) = $2,400,000 Semi-annual Interest Receivable
Interest Rate = 10%/2 = 5% compounded semiannually
Number of Periods = 15 Years*2 = 30 Periods
Present Value of Interest = $2,400,000 * PVA (5%, 30 periods)
= $2,400,000 * 15.3725
Present Value of Interest = $36,893,882.46
Present Value of Principal = $60,000,000 * PV (5%, 30 periods)
= 60,000,000 * 0.23138
Present Value of Principal = $13,882,646.92
Present Value of Bond = $36,893,882.46+$13,882,646.92 = $50,776,529
Discount = $60,000,000 - $50,776,529.38 = $9,223,470
