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Chapter 6 and 7 NR and BP
Chapter 6 and 7 NR and BP
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.
PV – OA = R (PVF – OAn, i)
PV – OA = $165,000 (15.37245)
PV – OA = $2,536,454
PV = FV (PVFn, i)
PV = $3,000,000 (0.23138)
PV = $694,140
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.