Bond issue price and premium amortization.
On January 1, 2007, Lowry Co. issued ten-year bonds with a face value of $1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .386
Present value of 1 for 10 periods at 12% .322
Present value of 1 for 20 periods at 5% .377
Present value of 1 for 20 periods at 6% .312
Present value of annuity for 10 periods at 10% 6.145
Present value of annuity for 10 periods at 12% 5.650
Present value of annuity for 20 periods at 5% 12.462
Present value of annuity for 20 periods at 6% 11.470
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $884,000. Prepare the amortization table for 2007, assuming that amortization is recorded on interest payment dates.
(a) The issue price of the bonds will be the present value of the interest and principal discounted at the given yield. The interest amount is 1,000,000X10%/2 = 50,000 every six months. Principal amount is 1,000,000. The time period is 10X2=20 for semi annual and the discounting rate is 12%/2=6%
Issue price = 50,000 X PVIFA (20,6%) + ...
The solution explains how to calculate the bond issue price and prepare an amortization table. 198 words with all calculations and tables displayed.