Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 1 Problem 12-21

1. The present value of the bonds using the interest rate of 11% is as follows:

PV of principal (5,000,000 x .6587) 3,293,500

PV of interest (500,000 x 3.1024) 1,551,200

Total present value of cash flows 4,844,700

2. The present value of the bonds using the interest rate of 12% is as follows:

PV of principal (5,000,000 x .6355) 3,177,500

PV of interest (500,000 x 3.0373) 1,518,650

Total present value of cash flows 4,696,150

3. X – 11%____

12% - 11%

4,700,000 – 4,844,700_

4,696,150 – 4,844,700

_144,700_ = .97

148,550

Effective rate = 11% + .97

= 11.97%

4. Interest income for 2008 (4,700,000 x 11.97%) 562,590

5. Journal entries

Held to maturity securities 4,700,000

Cash 4,700,000

Cash (10% x 5,000,000) 500,000

Interest income 500,000

Held to maturity securities 62,590

Interest income 62,590

Interest income 562,590

Interest received 500,000

Discounted amortization 62,590

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