Question

On February 28, 2009, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2008, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. If the total amount received (including accrued interest) by the issuing corporation is $5,060,000, which of the following is correct?

a) The bonds were issued at a premium.
b) The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $300,000.
c) The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $50,000.
d) The bonds were issued at a discount.

Answer 1

The bonds were issued at a premium since they were sold for $5,060,000, which is more than the $5,000,000 face value. This includes both the premium and the accrued interest up to the point of sale. The next semiannual interest payment would be $150,000, not including the unpaid accrued interest from the issuance.

Step-by-step explanation:

To address the question, let's first understand the details provided. We have a $5,000,000 bond with a 6% coupon rate, meaning the annual interest payment should be $300,000 (6% of $5,000,000), with semiannual payments of $150,000 every June 30 and December 31. Since the total amount received by the issuing corporation is $5,060,000, this includes accrued interest because the bonds were issued on February 28, 2009, but dated December 31, 2008. The bonds were issued after the interest had started to accrue but before the first payment.

We must find out how much of the $5,060,000 represents accrued interest for the period from December 31, 2008, to February 28, 2009. Given that the annual interest is $300,000, the daily interest accrued over 59 days (assuming February has 28 days) is approximately: $300,000/(365/2) * 59 ≈ $48,219.18

Answer (a) 'The bonds were issued at a premium.' is correct because the bonds were sold for more than their face value. The receipt of $5,060,000 for $5,000,000 of bonds indicates a premium of $60,000 in addition to the accrued interest.

Since the next interest payment would cover the interest accrued from the last paid interest (whether at issuance or actual payment), answer (b) 'The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $300,000.' is incorrect, as it should be $150,000 for the semiannual payment plus the accrued interest not yet paid out at the issuance of the bonds.

Answer (c) 'The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $50,000.' is incorrect because again, the amount is $150,000 half the annual interest, not accounting for the accrued interest that must be factored in.

Lastly, answer (d) 'The bonds were issued at a discount.' is incorrect because the bonds were sold for more than their face value, not less.

Answer 2

a) The bonds were issued at a premium.

Step-by-step explanation:

Given that

There are the bonds of $5,000,000

And, if the total amount received that involved the accrued interest also so the amount of the bond is $5,060,000

This means the bond is issued at premium as the value is increased i.e. fro m $5,000,000 the value is now $5,060,000

So, the option a is correct

And, the rest of the options would be incorrect