Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 453

The following journal entry records the $100,000 bonds issued at their face amount:

1/1

Present Value of Face Amount

6/30

Year 2007 Year 2011

12/31

10 periods

12/31

$100,000

Face

Amount

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$55,840

Present Value of Interest Payments

Semiannual Market Rate  6%

6/30

$100,000 Present Value of $16%,n 10 (0.55840)

$6,000 Present Value of an Annuity of $1

(7.36009)

6%,n 10

$44,160*

Exhibit 11

Present Value of Bonds

Issued at Face Amount

Credit Quality

The market rate of interest for a corporate bond is influenced
by a number of factors, including the credit quality of the issuer.
In June 2002, WorldComdisclosed a massive accounting
fraud within the company, prompting credit rating agencies

and bond investors to drastically lower their assessment of the

company’s credit quality. As a result, the price of WorldCom’s

$30 billion in bond debt dropped to 15 cents on the dollar,

or $4.5 billion in a few short weeks.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

* Because the present value tables are rounded to five decimal places, minor differences may appear in the

illustrations.

Jan. 1 Cash 100,000

Bonds Payable 100,000

SCF BS IS

Fc Ac Lc —

Present value of face amount of $100,000 due in 5 years, at 12%

compounded semiannually: $100,000 0.55840 (present value of $1

for 10 periods at 6%)............................................ .$ 55,840

Present value of 10 semiannual interest payments of $6,000, at 12%

compounded semiannually: $6,000 7.36009 (present value of annuity

of $1 for 10 periods at 6%)........................................ 44,160*

Total present value of bonds....................................... $100,000