ACCT 1A Lecture Notes - Lecture 11: Effective Interest Rate, Credit Risk, Accounts Receivable

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rosebuffalo981

16 Jul 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1A

Professor

seilo

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Document Summary

Bonds are always sold at their market price, which is the amount investors are willing to pay. A bond"s market price is determined by its present value, which equals the present value of the future principal payment plus the present value of the future interest payments. Two interest rates determine the price of a bond: the stated interest rate (or coupon rate) is the actual interest rate of the bond. The stated interest rate determines the amount of interest the borrower pays and the investor receives each year: the market interest rate or effective interest rate, is the rate that investors demand for loaning their money. Any entity may issue bonds with a stated interest rate that differs from the prevailing market interest rate. In fact, the two interest rates often differ because the issuer often has to finalize details of the bond weeks or months before the bonds are actually issued.

Related Questions

(a) On 1/1/2015, Shocker Company issued $100,000 face valuebonds. The stated rate for these bonds is 10%, and the interest ispaid semi-annually, on June 30 and December 31. The market rate onthe date of issue was 12%. Bonds mature in three years, on December31, 2017. Required In the table provided, write the amount of thepayment, and the date of all payments that must be made by ShockerCompany to bond holders. Date Amount Date Amount

Date	Amount

(b) On 1/1/2015, Sooner Company issued $100,000face value bonds that make semi-annually on June 30 and December31. The coupon rate is 10% and each semi-annual payment is $5,000.The market rate on the date of issue was 8%. Bonds mature in fiveyears, on December 31, 2019.

Required

On the date of issue, calculate the market price of the bond andrecord journal entry for the issuance of the bond. Showcalculations.

(b)answer for Sooner Company here:

Market Price of the bond on 1/1/2015 is:

Journal entry to be recorded on 1/1/2015:

Calculations for Sooner Company:

Number of period = ___ discount rate to be used = ___ %

Market Price of the bonds:

(c) On 1/1/2015, Gator Companyissued $200,000 face value bonds that mature in five years, onDecember 31, 2019. The bonds have stated rate of 10%, withsemi-annual payments, on June 30 and December 31. The market rateon the date of issue was 9%, and the bonds were sold for$207,913.

Required

In the amortization table provided, complete the entries for thedates indicated. Write journal entries to be recorded on 6/30/2015and 12/31/2015.

Date	Cash Interest Paid	Interest Expense	Increase/decrease in Outstanding Balance	Outstanding Balance
1/1/2015
6/30/2015
12/31/2015

The Credit Corporation sells 900 bonds. Each bond has a parvalue of $1000. The Bonds are sold on January 1, 2010. The interestrate listed on the bond is 8%. The bonds pay interest twice peryear, June 30th and December 31st. The bonds are 15- year bonds.The market interest rate (yield) for these types of bonds(securities) at the time the bonds are sold (January 1, 2010) is 6%annually.

Requirements:

a. What is the total amount of interest paid to the bondholdersover the life of the bonds?

b. What is the present value of the interest payments over thelife of the bonds?

c. What amount is paid to the bondholders to retire the bonds atthe end of 15 years?

d. What is the present value of the face amount of the bonds onJanuary 1, 2010?

e. What is the total amount the bonds sold for on January 1,2010?

f. What is the present value of the bond issue if the marketrate was 10% per year at date of issue?

g. Does the increase or decrease in interest rates in the marketover the life of the bonds impact your calculations in "f" above?Why or Why not? (explain)

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%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

What is the amount of each semiannual interest payment for these bonds?
How many semiannual interest payments will be made on these bonds over their life?
Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.

Par (maturity) value	Semiannual Rate		Semiannual cash interest payment
		=

Number of payments

Whether the bonds are issued at par, at a discount, or at a premium?

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

Table Values are Based on:
n =
i =
Cash Flow	Table Value	Amount	Present Value
Par (maturity) value
Interest (annuity)
Price of bonds

Prepare the journal entry to record the bondsâ issuance.

1- Record the issue of bonds with a par value of $800,000 for cash.

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ACCT 1A Lecture Notes - Lecture 11: Effective Interest Rate, Credit Risk, Accounts Receivable

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