Question

brin company issues bonds with a par value of $640,000. the bonds mature in 6 years and pay 7% annual interest in semiannual payments. the annual market rate for the bonds is 10%. (table b.1, table b.2, table b.3, and table b.4)
note: use appropriate factor(s) from the tables provided.

1. compute the price of the bonds as of their issue date.
2. prepare the journal entry to record the bonds’ issuance.

complete this question by entering your answers in the tabs below.
required 1 required 2
compute the price of the bonds as of their issue date.
note: round all table values to 4 decimal places, and use the rounded table values in calculations. round intermediate calculations to the nearest dollar amount.
table values are based on:
n = 12
i = 5.0%
cash flow table value amount present value
par (maturity) value
interest (annuity)
price of bonds $ 0

Explanation:

Step1: Determine n and i

The bonds mature in 6 years with semiannual payments, so \( n = 6 \times 2 = 12 \) periods. The annual market rate is 10%, so the semiannual rate \( i = \frac{10\%}{2} = 5\% \) or 0.05.

Step2: Calculate interest payment

The annual interest rate is 7%, so the semiannual interest rate is \( \frac{7\%}{2} = 3.5\% \) or 0.035. The interest payment (annuity) each period is \( \$640,000 \times 0.035 = \$22,400 \).

Step3: Find present value of par value (lump sum)

Using the present value of $1$ table for \( n = 12 \) and \( i = 5\% \). From tables, \( PVIF(5\%, 12) \approx 0.5568 \) (rounded to 4 decimals). The present value of par value is \( \$640,000 \times 0.5568 = \$356,352 \).

Step4: Find present value of interest payments (annuity)

Using the present value of an ordinary annuity table for \( n = 12 \) and \( i = 5\% \). From tables, \( PVIFA(5\%, 12) \approx 8.8633 \) (rounded to 4 decimals). The present value of interest payments is \( \$22,400 \times 8.8633 \approx \$198,538 \) (rounded to nearest dollar).

Step5: Calculate bond price

Add the present value of par value and present value of interest payments: \( \$356,352 + \$198,538 = \$554,890 \).

Answer:

The price of the bonds as of their issue date is $\$554,890$.