Question
In: Accounting
Nguyen Corporation issued a $8,700,000, 5 percent bond on August 1, 2017. The market interest rate...
| Nguyen Corporation issued a $8,700,000, 5 percent bond on August 1, 2017. The market interest rate was 6 percent on that date and the bond matures in eight years. Interest on these bonds is payable annually on August 1. The company uses the effective interest method and its fiscal year ends on November 30. Use Table 9C.1, Table 9C.2 |
| Required: | |
| 1. | Compute the issue price of the bond on August 1, 2017. (Do not round intermediate calculations. Round the final answer to the nearest whole dollar.) |
| 2. | Prepare the journal entries on November 30, 2017, and on August 1, 2018, to record interest expense. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) |
| 3. | Assume that the company redeems 35 percent of the original bond at 103 on August 1, 2018, after the payment of interest. Compute the accounts and amounts that the company should report on its statement of financial position as at August 1, 2018, after the redemption of the bonds. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) |
| 4. | How would the effect of the redemption transaction be reported on the statement of earnings and the statement of cash flows for the year ending November 30, 2018? The company uses the indirect method to prepare the operating section of the statement of cash flows. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) |
Solutions
Expert Solution
| 1 | Issue price of the bond=Present value of interest payment+Present value of principal | ||||||
| Discount factor=Market rate=6% | |||||||
| Interest payment per annum=Face value of the bond*Coupon rate=8700000*5%=$ 435000 | |||||||
| Term of the bond=5 years | |||||||
| Present value of interest payment=interest payment*PV annuity factor at 6% for 5 years=435000*4.212364=$ 1832378 | |||||||
| Present value of principal=Principal*PV factor at 6% for 5th year=8700000*0.747258=$ 6501146 | |||||||
| Issue price=1832378+6501146=$ 8333524 | |||||||
| 2 | Amortization table | ||||||
| Date | Interest payment | Interest expense | Discount amortized | Unamortized discount | Carrying value of the bond | ||
| a | b | c=b-a | |||||
| Aug 1,2017 | 366476 | 8333524 | |||||
| (8700000-8333524) | |||||||
| Aug 1,2018 | 435000 | 500011 | 65011 | 301465 | 8398535 | ||
| Interest payment=$ 435000 | |||||||
| Interest expense=8333524*6%=$ 500011 | |||||||
| Unamortized discount=366476-65011=$ 301465 | |||||||
| Carrying value of the bond=Face value of the bond-Unamortized discount=8700000-301465=$ 8398535 | |||||||
| Journal entries: | |||||||
| Date | Account titles | Debit | Credit | ||||
| Nov 30,2017 | Interest expense | (500011*4/12) | 166670 | ||||
| Discount on bonds payable | (Balancing figure) | 21670 | |||||
| Interest payable | (435000*4/12) | 145000 | |||||
| (Interest due from Aug 1 to Nov 30-4 months) | |||||||
| Aug 1,2018 | Interest payable | 145000 | |||||
| Interest expense | (500011*8/12) | 333341 | |||||
| Discount on bonds payable | (Balancing figure) | 43341 | |||||
| Cash | 435000 | ||||||
| (Interest paid) | |||||||
| 3 | Statement of financial position (Extract) | ||||||
| Long-term liabilities: | |||||||
| $ | $ | ||||||
| Bonds payable | (8700000*65%) | 5655000 | |||||
| Less: Unamortized discount | (301465*65%) | 195952 | 5459048 | ||||
| 4 | Statement of earnings (Extract) | ||||||
| $ | |||||||
| Loss on redemption | (Note:1) | 196863 | |||||
| Note:1 | |||||||
| Loss on redemption: | |||||||
| $ | |||||||
| Redemption price | (8700000*35%*103%) | 3136350 | |||||
| Unamortixed discount | (301465*35%) | 105513 | |||||
| 3241863 | |||||||
| Less: Face value of bonds redeemed | |||||||
| (8700000*35%) | 3045000 | ||||||
| Loss on redemption | 196863 | ||||||
| Statement of cash flows (Extract) | |||||||
| $ | |||||||
| Cask flow from operating activities: |
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