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In: Accounting

BONDS : Huskies Corp. issued 9-year $750,000 bond on January 1, 2006 with coupon rate of...

BONDS :

Huskies Corp. issued 9-year $750,000 bond on January 1, 2006 with coupon rate of 10%. The bond pays interest semiannually every June 30 and December 31, with the principal to be paid at the end of year 9. The effective market interest rate at the issuance date is 8%.

a. Calculate the proceeds and show clearly what you use for RATE, NPER, PMT, FV ?

b. What journal entry was recorded at issuance?

c. What annual coupon rate would Huskies have to offer in order to obtain total proceeds of $750,000 on the issuance of these bonds

d. UNRELATED to above. Labradors Inc. repurchased the bond which has been issued several years ago and which has a Face Value of $800,000 and unamortized premium of $42,000. The bond was repurchased at 106. Record the journal entry that the company made when it repurchased the bond.

Solutions

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A. When the bond stated rate is higher than the market interest rate, the bond is sold at a premium, and the issuing company will receive more than the face value of the bond. the Details are as under

01-01-06 Issue            750,000.00
Coupon Rate 5%
YTM 4.0%
Period 18
Interest payment               37,500.00
PV ($844,944.73)
Date Interest Payment Interest Expenses Premuim Amortisation Amortized Cost
01-01-06 Proceeds $844,944.73
30-06-06                 37,500.00 $33,797.79 ($3,702.21) $841,242.52
31-12-06                 37,500.00 $33,649.70 ($3,850.30) $837,392.22
30-06-07                 37,500.00 $33,495.69 ($4,004.31) $833,387.91
31-12-07                 37,500.00 $33,335.52 ($4,164.48) $829,223.42
30-06-08                 37,500.00 $33,168.94 ($4,331.06) $824,892.36
31-12-08                 37,500.00 $32,995.69 ($4,504.31) $820,388.05
30-06-09                 37,500.00 $32,815.52 ($4,684.48) $815,703.58
31-12-09                 37,500.00 $32,628.14 ($4,871.86) $810,831.72
30-06-10                 37,500.00 $32,433.27 ($5,066.73) $805,764.99
31-12-10                 37,500.00 $32,230.60 ($5,269.40) $800,495.59
30-06-11                 37,500.00 $32,019.82 ($5,480.18) $795,015.41
31-12-11                 37,500.00 $31,800.62 ($5,699.38) $789,316.03
30-06-12                 37,500.00 $31,572.64 ($5,927.36) $783,388.67
31-12-12                 37,500.00 $31,335.55 ($6,164.45) $777,224.21
30-06-13                 37,500.00 $31,088.97 ($6,411.03) $770,813.18
31-12-13                 37,500.00 $30,832.53 ($6,667.47) $764,145.71
30-06-14                 37,500.00 $30,565.83 ($6,934.17) $757,211.54
31-12-14                 37,500.00 $30,288.46 ($7,211.54) $750,000.00
              375,000.00              330,550.86                           (44,449.14)

b) Entry at issuance as follows:

CASH DR $844,944.73
BOND CR            750,000.00
Premium on Bond Payable CR $94,944.73
( Being entry pass at issuance)

c) When the bond stated rate is equal to  market interest rate than proceeds is $ 7,50,000

D)

Premuim on Bond Payable DR $42,000
Bond DR $1,018,000
BANK CR $1,060,000

.


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