The Brinkerhoff Company signed a $ 400,000, 6 percent, four- year bond dated May 1, 2011, when
Question:
The Brinkerhoff Company signed a $ 400,000, 6 percent, four- year bond dated May 1, 2011, when the market rate of interest was 6 percent. Interest on the bond is payable semiannually on November 1 and May 1 each year. The company closes its books annually on December 31. Prepare the entries for the issuance of the bond and for events related to the bond during the first year of the bond’s life. How is the bond reported on Brinkerhoff’s balance sheet, income statement, and cash flow statement for the year ended December 31, 2011?
Step by Step Answer:
5110 Cash 400000 Bond payable 400000 11110 Interest Expense 12000 Cash 12000 123110 Inte...View the full answer
Introduction to Accounting An Integrated Approach
ISBN: 978-0078136603
6th edition
Authors: Penne Ainsworth, Dan Deines
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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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