Question

Denzel Corporation i planning to iue bond with a face value of $730,000 and a coupon rate of 7. 5 percent. The bond mature in 6 year and pay interet emiannually every June 30 and December 31. All of the bond were old on January 1 of thi year. Denzel ue the effective-interet amortization method and alo ue a dicount account. Aume an annual market rate of interet of 8. 5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

Note: Ue appropriate factor() from the table provided. Required:

1. And 2. Prepare the journal entrie to record the iuance of the bond and interet payment on June 30 of thi year. 3. What bond payable amount will Denzel report on it June 30 balance heet?

Answer 1

In order to respond to the student's question, we need to apply the present value and effective interest amortization methods to Denzel Corporation's bonds to calculate their issuance price, interest payments, and balance sheet reporting.

Step-by-step explanation:

The student is asking about how to compute the issuance and interest payment journal entries for a bond issued by Denzel Corporation, and how to report the bond payable amount on the balance sheet. Using the given details, the issuance price would be calculated using the present value of an annuity formula, considering the semiannual coupon payments and the lump sum payment at maturity, all discounted at the market interest rate of 8.5%. The effective interest amortization method would take into account the difference between the coupon interest payment and the interest expense based on the market rate, adjusting the book value of the bonds payable over time.

To calculate the journal entry for the interest payment on June 30, we need to apply the effective interest rate to the carrying amount of the bond to determine the interest expense, and then account for the actual cash payment made, which is based on the 7.5% coupon rate. A plug figure for the discount on bonds payable account is used to balance the entry. On the June 30 balance sheet, Denzel Corporation will report the bonds payable amount as the face value of the bonds less the unamortized discount.

Answer 2

A two-year bond with a face value of $3,000 and an 8% coupon rate has a present value of $3,000 at a discount rate of 8%. If the discount rate increases to 11%, the present value and thus the value of the bond decreases.

Step-by-step explanation:

When considering a two-year bond with an initial face value of $3,000 and a coupon rate of 8%, the bond will pay $240 in interest each year. Using a discount rate of 8%, the present value of the bond's payments can be calculated. The first year's interest payment of $240 would have a present value of $240/(1 + 0.08)¹ = $222.20, and the second year's interest and principal payment of $3,240 ($240 + $3,000) would have a present value of $3,240/(1 + 0.08)² = $2,777.80. Adding these together, the total present value of the bond is $3,000. If the discount rate rises to 11%, the present value of these payments would decrease, thus reducing the overall value of the bond.