On January 1, 2014, Branagh Limited issued for $1,075,230 its 20-year, 13% bonds that have a maturity

Question:

On January 1, 2014, Branagh Limited issued for $1,075,230 its 20-year, 13% bonds that have a value of $1 million and pay interest semi-annually on January 1 and July 1. The bond issue costs were not material in amount. Three presentations follow of the statement of financial position long-term liability section that might be used for these bonds at the issue date:
1. Bonds payable (maturing January 1, 2034) ................................................ $1,075,230
2. Bonds payable principal (face value $1,000,000, maturing January 1, 2034) ............ 97,220a
Bonds payable interest (semi-annual payment of $65,000) ................................... 978,010b
Total bond liability .............................................................................. $1,075,230
3. Bonds payable principal (maturing January 1, 2034) .................................... $1,000,000
Bonds payable interest ($65,000 per period for 40 periods) ................................. 2,600,000
Total bond liability .............................................................................. $3,600,000
a The present value of $1 million due at the end of 40 (six-month) periods at the yield rate of 6% per period
b The present value of $65,000 per period for 40 (six-month) periods at the yield rate of 6% per period
Instructions
(a) Discuss the conceptual merit(s) of each of the three date-of-issue statement of financial position presentations shown above.
(b) Explain why investors would pay $1,075,230 for bonds that have a value of only $1 million.
(c) Assuming that, at any date during the life of the bonds, a is needed to calculate the carrying value of the obligations that arise from a bond issue, discuss the conceptual merit(s) of using the following for this purpose:
1. The or nominal rate
2. The effective or yield rate at date of issue
(d) If the obligations arising from these bonds are to be carried at their present value and this is calculated according to the current market rate of interest, how would the bond valuation at dates after the date of issue be affected by an increase or a decrease in the market rate of interest?
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