Question

On January 1, 2018, Frontier World issues $40.7 million of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. rev: 11_03_2016_QC_CS-68413 Required: 1-a. If the market rate is 8%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

Answer 1

$44,728,243.62

Step-by-step explanation:

face value $40,700,000

coupon rate 9%, semiannual 4.5%

maturity 20 years x 2 = 40 periods

market interest rate 8%

issue price?

present value of face value = $40,700,000 / (1 + 4%)⁴⁰ = $8,477,364.12

present value of coupon payments = $1,831,500 x 19.793 (PV annuity factor, 4%, 40 periods) = $36,250,879.50

market price = $8,477,364.12 + $36,250,879.50 = $44,728,243.62

Journal entry to record issuance of the bonds:

January 1, 2018, bonds are issued at a premium

Dr Cash 44,728,243.62

Cr Bonds payable 40,700,000

Cr Premium on bonds payable 4,028,243.62