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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
On June 30, 2019, Gaston Corporation sold $800,000 of 11% face value bonds for $761,150.96. On December 31, 2019, Gaston sold $700,000 of this same bond issue for $734,645.28. The bonds were dated January 1, 2019, pay interest semiannually on each December 31 and June 30, and are due December 31, 2026.
Required:
Compute the effective yield rate on each issuance of Gaston’s 11% bonds.
Calculate the effective yield rate on each issuance of Corporation G’s 11% bonds.
Bonds:
Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Calculate issue price of the bonds as on 30th June 2019.
| Particulars | Amount (A) | Present value factor (B) | Value of the Bonds (A × B) |
| Present value of principal | $800,000 | 0.417265 | $333,812.00 |
| Add: Present value of interest (1) | $44,000 | 9.712249 | $427,338.96 |
| Selling price of the bonds | $761,150.96 | ||
Table (1)
Note: The Present value of an ordinary annuity of $1 for 15 periods at 6% is 9.712249 (refer Table 4 in TVM Module). And the present value of $1 for 15 periods at 6% is 0.417265 (refer Table 3 in TVM Module).
Working note (1):
Calculate present value interest amount.
Therefore, effective annual interest rate is 12% calculated by trial and error method using the TVM modules
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