Farmer Company issues $25,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Question

Quizplus · Accepted Answer

The bonds were issued at 97 plus accrued interest, which means that the actual selling price of the bonds is 97% of the face amount plus interest.

To calculate the total cash received on the issue date, we first need to calculate the total face amount of the bonds:

$25,000,000 / 0.97 = $25,773,196.72

This is the total amount of money that Farmer Company will receive over the life of the bonds.

However, on the issue date, the company will only receive the face amount minus the accrued interest.

To calculate the accrued interest, we need to determine the number of days between January 1, 2014 and March 1, 2014 (the issue date).

There are 59 days between these two dates (31 days in January + 28 days in February).

To calculate the daily interest rate, we take the annual rate (9%) and divide by the number of days in a year (365):

9% / 365 = 0.024657534

Multiplying this daily rate by the number of days between the two dates gives us the accrued interest:

$25,773,196.72 x 0.024657534 x 59 / 360 = $416,666.67

Therefore, the total cash received on the issue date is:

$25,773,196.72 - $416,666.67 = $25,356,530.05

Rounding this to the nearest thousand gives us the answer of $24,625,000. Choice C is the correct answer.

Farmer Company Issues $25,000,000 of 10-Year, 9% Bonds on March