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Concord Hills Ltd. issued five-year bonds with a face value of $150,000 on January 1. The bonds have a coupon interest rate of 6% and interest is paid semi-annually on June 30 and December 31. The market interest rate was 4% when the bonds were issued at a price of 107. Determine the balance in the Bonds Payable account immediately following the first interest payment.

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Answer:

To determine the balance in the Bonds Payable account immediately following the first interest payment, we need to calculate the remaining balance of the bond after the interest payment is made.

First, let's calculate the semi-annual interest payment. The coupon interest rate is 6%, which is applied to the face value of $150,000. So, the semi-annual interest payment can be calculated as:

Interest Payment = Face Value * Coupon Interest Rate / 2

= $150,000 * 6% / 2

= $4,500

Next, let's calculate the interest expense for the first interest payment. The interest expense is calculated based on the market interest rate at the time of bond issuance and the bond's carrying value. The carrying value is the bond's face value minus any discount or plus any premium.

The bond was issued at a price of 107, which implies a premium of 7% over the face value. The carrying value can be calculated as:

Carrying Value = Face Value + Premium

= $150,000 + ($150,000 * 7%)

= $150,000 + $10,500

= $160,500

The interest expense for the first interest payment can be calculated as:

Interest Expense = Carrying Value * Market Interest Rate / 2

= $160,500 * 4% / 2

= $3,210

Subtracting the interest payment of $4,500 from the interest expense of $3,210, we get the reduction in the bond's carrying value:

Reduction in Carrying Value = Interest Payment - Interest Expense

= $4,500 - $3,210

= $1,290

Finally, we can calculate the balance in the Bonds Payable account following the first interest payment by subtracting the reduction in the carrying value from the original amount of the bond:

Balance in Bonds Payable = Original Amount - Reduction in Carrying Value

= $150,000 - $1,290

= $148,710

Therefore, the balance in the Bonds Payable account immediately following the first interest payment is $148,710.

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