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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Present value of bonds payable; discount

Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co. issued $25,000,000 of five-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable, using the present value tables in Exhibits 8 and 10. Round to the nearest dollar.

To determine

Time value of money: Any amount invested today earns an additional income, called interest income, after a certain period. This is called as time value of money.

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

To calculate: The present value of the bonds payable.

Explanation

Determine the present value of the bonds payable.

Step 1: Calculate the semiannual interest on bonds.

Interest=Face value×Face interest rate×Interest time period=$25,000,000×7%×612=$875,000

Step 2: Calculate the present value of interest.

Particulars Amount
Interest payment (a) $875,000
PV factor at semiannual market interest rate of 4.5% for 10 periods (b) 7.91272
Present value (a)×(b) $6,923,630

Table (1)

Note: The present value factor for 10 periods at 4.5% interest would be 7.91272 (Refer Exhibit 10 in the chapter for present value factor).

Step 3: Calculate the present value of lump sum payment of $25,000,000 (principal amount) at 4.5% for 10 periods

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