RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2011, with interest payable on January 1 and July 1 of each year.
If the bonds were issued at 97 on April 1, 2011, plus accrued interest, the amount of cash received by RCM Corporation would be

Question

Quizplus · Accepted Answer

The bonds were issued on January 1, 2011, so they accrued interest from that date to the date of issuance, April 1, 2011. This is a 3-month period, or 1/4 of a year. The annual interest on $200,000 of 10% bonds is $20,000, so the interest for 1/4 of a year is:

$20,000 × 1/4 = $5,000

The bonds were issued at 97, which means they were sold for 97% of face value. The face value of the bonds is $200,000, so the amount received by RCM Corporation is:

$200,000 × 97% = $194,000

Adding the accrued interest of $5,000, we get:

$194,000 + $5,000 = $199,000.

Therefore, the amount of cash received by RCM Corporation would be $199,000.

RCM Corporation, a Calendar-Year Firm, Is Authorized to Issue $200,000