Purchase Solution

Compute bond prices; prepare journal entries for stock and bond transactions

Not what you're looking for?

Ask Custom Question

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Present value of annuity for 10 periods at 3% 8.5302
Present value of annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756
-------------------------------------------------------------------------------

A corporation had stockholders' equity on January 1 as follows: Common Stock, $5 par value, 1,000,000 shares authorized, 500,000 shares issued; Contributed Capital in Excess of Par Value, Common Stock, $1,000,000; Retained Earnings, $3,000,000. Prepare journal entries to record the following transactions:

Feb 15 The board of directors declared a 5% stock dividend to stockholders of record on March 1, to be issued on March 20. The stock was trading at $6 per share prior to the dividend.

MAR 1 The date of record

MAR 20 Issued the stock dividend
--------------------------------------------------------------

On January 1, 2007, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1, 2007.
---------------------------------------------------------------

Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to record the following transactions. Include any year-end adjustments.

DEC 21 Purchased inventory for Acquilla Co. for 500,000 Mexican pesos. The exchange rate was $0.0914 per peso. The credit terms were n/30.

DEC 31 The exchange rate was $0.0917 per peso.

JAN 20 Paid Acquilla Co. for the Dec 32 purchase. The exchange rate was $0.0920 per peso.

Purchase this Solution

Solution Summary

The solution explains how to compute bond prices and journal entries relating to stock and bond transactions

Solution Preview

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual (this should be semi annual) interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:
Present value of annuity for 10 periods at 3% 8.5302
Present value of annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756

The price of the bonds is the present value of interest and principal. The annual interest is 300,000X8% = 24,000 and the principal amount is $300,000. Interest is an annuity and so we use the PV of annuity. Principal is a lump sum and so we use PV of $1. The discounting rate is the market rate of interest which is 6%. The tables above imply semi annual interest payment as we are given for 10 periods and 3% and 4% rate. Doing on semi annual basis, semi annual interest would be 12,000, periods would be 10 and rate would be 6%/2 = 3%
Price of bonds = 12,000 X 8.5302 + ...

Purchase this Solution


Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Basics of corporate finance

These questions will test you on your knowledge of finance.