Question

Metlock Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,086,500 of 12% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 10%.

As the controller of the company, determine the selling price of the bonds

Answer 1

Answer:

market price of the bonds = $3,560,887.18

Explanation:

In order to determine the market price of the bonds we must add the present value of the bonds' face value + present value of the coupon payments:

PV of face value = $3,086,500 / (1 + 5%)³⁰ = $714,146.50

PV of coupon payments = $185,190 x 15.372 (PV annuity factor, 5%, 30 periods) = $2,846,740.68

market price of the bonds = $3,560,887.18

The journal entry to record the issuance of the bonds:

March 1, 2020, bonds are issued at a premium

Dr Cash 3,560,887.18

    Cr Bonds payable 3,086,500

    Cr Premium on bonds payable 474,387.18