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    The company issued $3 million in 11% corporate bonds due in 2027 to raise funds for a new plant. As the bonds were issued when the market rate was 10%, the bonds would need to be sold above par value to yield the market rate. Calculating the present value of the interest payments and principal reveals the bonds should be sold for $3,230,594.

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    The company issued $3 million in 11% corporate bonds due in 2027 to raise funds for a new plant. As the bonds were issued when the market rate was 10%, the bonds would need to be sold above par value to yield the market rate. Calculating the present value of the interest payments and principal reveals the bonds should be sold for $3,230,594.

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    Chapter 6 and 7 NR and BP

    Uploaded by

    Ca Ada
    The company issued $3 million in 11% corporate bonds due in 2027 to raise funds for a new plant. As the bonds were issued when the market rate was 10%, the bonds would need to be sold above par value to yield the market rate. Calculating the present value of the interest payments and principal reveals the bonds should be sold for $3,230,594.

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    of 2

    E6-13 (Computation of Bond Liability) Messier Inc. manufactures cycling equipment.

    Recently, the
    vice president of operations of the company has requested construction of a new plant to meet the
    increasing demand for the company's bikes. After a careful evaluation of the request, the board of
    directors has decided to raise funds for the new plant by issuing $3,000,000 of 11 % term corporate
    bonds on March I, 2012, due on March 1,2027, with interest payable each March 1 and September 1.
    At the time of issuance, the market interest rate for similar financial instruments is 10%.
    As the controller of the company, determine the selling price of the bonds.

    Formula for the interest payments:

    PV – OA = R (PVF – OAn, i)

    PV – OA = $165,000 (PVF – OA30, 5%)

    PV – OA = $165,000 (15.37245)

    PV – OA = $2,536,454

    Formula for the principal:

    PV = FV (PVFn, i)

    PV = $3,000,000 (PVF30, 5%)

    PV = $3,000,000 (0.23138)

    PV = $694,140

    The selling price of the bonds = $2,536,454 + $694,140 = $3,230,594.


    EXERCISE 7-18

    Retoul Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The
    customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
    On July 1, 2010, Rentoul Inc. made two sales.
    1. If rendered services in exchange for a 5%, 8-year promissory note having a face value of $400,000
    (interest payable annually).

    2. It sold land having a fair market value of $900,000 in exchange for a 4-year zero-interest-bearing
    promissory note in the face amount of $1,416,163. The land is carried on Rentoul’s books at a cost of
    $590,000.

    Instructions:
    Record the two journal entries that should be recorded by Rentoul Inc. for the sales transactions above
    that took place on July 1, 2010.

    1. 7/1/10 Notes Receivable 400,000.00


    Discount on Notes Receivable 139,095.2
    Service Revenue 260,904.8

    Computation of the present value of the note:


    Maturity value $400,000.00
    Present value of $400,000 due in
    8 years at 12%—$400,000 X .40388 $161,552.00
    Present value of $20,000
    payable annually for 8 years at
    12% annually—$20,000 X 4.96764 99,352.8
    Present value of the note 260,904.8
    Discount on notes receivable $139,095.2

    2. 7/1/10 Notes Receivable 1,416,163


    Discount on Notes Receivable 516,163
    Land 590,000
    Gain on Sale of Land
    ($900,000 – $590,000) 310,000

    Computation of the discount


    $1,416,163 Face value of note
    .63552 Present value of 1 for 4 periods at 12%
    $ 900,000 Present value of note
    1,416,163 Face value of note
    $ 516,163 Discount on notes receivable

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