Question

Compute the cash proceeds from bond issues under the following terms. For each case, indicate whether the bonds sold at a premium or discount. (Round your answers to the nearest dollar amount.)

a. Pear, Inc. issued $218,000 of 10-year, 8 percent bonds at 102.
b. Apple, Inc. issued $63,000 of five-year, 12 percent bonds at 97.
c. Cherry Co. issued $128,000 of five-year, 6 percent bonds at 102 1/4.
d. Grape, Inc. issued $65,000 of four-year, 8 percent bonds at 99.00.
A. Premium; Premium; Premium; Discount
B. Discount; Premium; Premium; Discount
C. Premium; Discount; Premium; Discount
D. Discount; Discount; Discount; Premium

Answer 1

The cash proceeds from the bond issues are obtained by multiplying the face value of the bonds by the percentage at which they are issued, resulting in Pear, Inc. and Cherry Co. bonds being sold at a premium, while Apple, Inc. and Grape, Inc. bonds sold at a discount.

Step-by-step explanation:

To compute the cash proceeds from the bond issues mentioned, we multiply the face value of the bonds by the percentage at which they are issued. Here are the calculations:

Pear, Inc.: $218,000 × 102% = $222,360 (Premium)

Apple, Inc.: $63,000 × 97% = $61,110 (Discount)

Cherry Co.: $128,000 × 102.25% = $130,880 (Premium)

Grape, Inc.: $65,000 × 99% = $64,350 (Discount)

When a bond is sold at a price above its face value (for example, at 102%), it is sold at a premium. Conversely, when a bond is sold below its face value (like at 97%), it is sold at a discount. The answer to the student's question is option C: Premium; Discount; Premium; Discount.