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Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued $80,000,000 of five-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following, presenting figures used in your computations: a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 8 and 10. Round to the nearest dollar. b. The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. c. The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar. d. The amount of the bond interest expense for the first year.

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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 26E
Textbook Problem
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Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued $80,000,000 of five-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following, presenting figures used in your computations:

  1.        a.       The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 8 and 10. Round to the nearest dollar.
  2.       b.       The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.
  3.        c.       The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.
  4.       d.       The amount of the bond interest expense for the first year.

(a)

To determine

Calculate the amount of cash proceeds (present value) from the sale of the bonds.

Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

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 amount of cash proceeds (present value) from the sale of the bonds.

Step 1: Calculate the semiannual interest on bonds.

Interest=Face value×Face interest rate×Interest time period=$80,000,000×9%×612=$3,600,000

Step 2: Calculate the present value of interest.

ParticularsAmount
Interest payment (a)$3,600,000
PV factor at semiannual market interest rate of 6% for 10 periods (b)7.36009
Present value (a)×(b)$26,496,324

Table (1)

Note: The present value factor for 10 periods at 6% interest would be 7

(b)

To determine

Calculate the amount of discount to be amortized for the first semiannual interest payment period.

(c)

To determine

Calculate the amount of discount to be amortized for the second semiannual interest payment period.

(d)

To determine

Calculate the amount of bond interest expense for first year.

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Chapter 14 Solutions

Financial Accounting
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