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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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.

To determine

Calculate the effective yield rate on each issuance of Corporation G’s 11% bonds.

Explanation

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.

ParticularsAmount (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.

Present value interest =Face value of bonds×Stated interest rate×Time period=$800,000×11100×612=$44,000

Therefore, effective annual interest rate is 12% calculated by trial and error method using the TVM modules

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