   Chapter 14, Problem 14.22EX

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Present value of bonds payable; premiumMoss Co. issued $42,000,000 of five-year, 11% 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=$42,000,000×11%×612=$2,310,000 Step 2: Calculate the present value of interest.  Particulars Amount Interest payment (a)$2,310,000 PV factor at semiannual market interest rate of 4.5% for 10 periods (b) 7.91272 Present value (a)×(b) $18,278,383 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$42,000,000 (principal amount) at 4.5% for 10 periods.

 Particulars Amount Single payment (a) \$42,000,000 PV factor at semiannual market interest rate of 4

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