Intermediate Accounting Time Value of Money

Stech Co. Is issuing $7.5 million 12% bonds in a private placement on July 1, 2015. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. at the time of the issuance, the market interest rate for similar types of bonds was 8%.

A. What is the expected selling price of the bonds?

B. Explain how the answer you computed in part A passes the reasonableness test.

C. Prepare the journal entry that Stech Co. will make when the bonds are issued.

D. The bond indenture agreement requires that Stech Co. deposit money in a bond sinking fund semi annually beginning on the first interest payment date. The controller estimates that the annual rate of interest earned on the investments in the sinking fund will be 8%. What amount must be deposited annually in order to have enough money in the fund to pay off the bonds in 10 years?

E. Prepare the entry that will be made each year to record the payment to the sinking fund.

F. In what section of the classified balance sheet will the bond sinking fund appear?