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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.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 21E
Textbook Problem
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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

Calculate the present value of the bonds payable.

Explanation of Solution

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.

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.

ParticularsAmount
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)

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Chapter 14 Solutions

Financial Accounting
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