[bryceallant]

On January 1, year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available:

5% 8%
Present value of $1 (n = 5) 0.78353 0.68058
Present value of an ordinary annuity (n = 5) 4.32948 3.99271

What amount is the value of net bonds payable at the end of year 1?

$88,022
$90,064
$100,000
$110,638

The answer is $90,064. How in the world do you calculate this? I have been sitting here for thirty minutes trying to figure out this problem. Is this as hard as I think it is?

[bryceallant]

I calculated (100,000*.05)*(4.32948) = 21,647
100,000*0.68058 = 68,058
21,647 + 68058 = $89,705

Where is $90,064 coming from???

[Stilgoin]

100,000 x .68058 = 68,058
100,000 x .05 = 5,000
5,000 x 3.99271 = 19,964

68,058 + 19,964 = 88,022

For end of year, add back amortization.

88,022 x .08 = 7,042
7042-5000= 2,042

88,022 + 2,042 = 90,064

1/1
Dr Cash 88,022
Dr Discount on BP 11,978
Cr Bonds Payable 100,000

12/31
Dr Interest Expense 7,042
Cr Amortization of Discount 2,042
Cr Interest Payable/Cash 5,000

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[bryceallant]

Wow, thank you! Definitely as hard as I thought it was..

[vodrldnr]

When you encounter bond problem like this, you should pay attention which interest you will use

my tip is to calculate the PV of bond principle and interest separately

1. PV of bond => use market interest rate => since it is one time payment uses PV of $1

2. PV of interest => it is ordinary annuity cuz it is due on 12/31 => firs, calculate the annul interest and find the pv of all interest to be paid over the time

sum 1+2 => give you PV value of the bond and

do not forget amortize it

since it is issued at Discount, you have to add back the amount of atomization at the end of each reporting period.

that will give you

88,022 + 2,042 = 90,064

[Author]

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