Question
In: Accounting
5. Opal Corporation is required to pay the pension cost of one of its unionized employees....
5. Opal Corporation is required to pay the pension cost of one of its unionized employees. According to the terms of the union contract, the employee will retire in 4 years and receive $45,000 at the end of the 14 consecutive years following retirement. Interest is compounded annually.
The pension obligation that Opal has incurred today if the discount rate is 9% is?
6. Determine the bond issues proceeds for each of the following bonds payable. All proceeds are issued on January 1,2019.
A. Silly Corporation issued bonds in the amount of $60,000 that will be paid in 12 years. Interest of $8,400 is payable annually each December 31 with the first interest payment at the end of the year on December 31,2019. If the market rate of interest is 12% is the amount of the bond issue proceeds?
B. Master Corporation issued bonds in the amount of $450,000 that will be paid in 9 years. Interest of $9,000 is payable semiannually each June 30 and December 31 with the first interest payment at the end of the period on June 30,2019. If the market rate of interest is 10%, what is the amount of the bond issue proceeds?
Solutions
Expert Solution
| 5. Given Facts: | |||||||||
| Future value of obligation =$45000 | |||||||||
| Term = 4 years plus 14 years = 18 years | |||||||||
| Discount rate = 9% | |||||||||
| Present value of obligation = Future value*Discount factor for 18 years@9% | |||||||||
| Discount factor = 1/(1+r)^n where r=9%, n=18 which is 0.211994 | |||||||||
| Present value of obligation = 45000*0.211994 = $9540 | |||||||||
| 6.A. Given Facts: | |||||||||
| Face value of bond =60000 | |||||||||
| Term = 12 years | |||||||||
| Annual interest = 8400 | |||||||||
| Discount rate =12% | |||||||||
| Issue proceeds of bond is calculated by adding the present value of bond maturity value and the total | |||||||||
| of present value of interest payments considering market rate as discount rate | |||||||||
| (ie.) Issue proceeds = PV of maturity value plus PV of interest payments | |||||||||
| Present value of bond maturity value: | |||||||||
| Maturity value is nothing but the face value of bond. To get present value of bond maturity value in this | |||||||||
| case, we need to discount $60000 @12% at the PV factor for 12 years | |||||||||
| PV Factor for 12 years @12% = 1/((1+r)^n) where r=12% and n=12 | |||||||||
| PV factor = 1/((1.12)^12) which is 0.256675 | |||||||||
| PV of bond maturity value = 60000*0.256675 = $15400 | |||||||||
| Present value of Interest payments: | |||||||||
| Annuity factor @12% for 12 years = (1-(1+r)^-n)/r where r= 12% and n =12 years = 6.194374 | |||||||||
| PV = 8400*6.194374 = 52032 | |||||||||
| Issue proceeds of bond = 15400+52032 =$67432 | |||||||||
| 6.B. Given Facts: | |||||||||
| Face value of bond =450000 | |||||||||
| Term = 9 years ie. 18 half years | |||||||||
| Half year interest = 9000 | |||||||||
| Discount rate =10% annually ie. 5% semi annually | |||||||||
| Similar to 6A, | |||||||||
| PV factor for 18 term @5% is 0.415521 and Annuity factor for 18 term @5% is 11.68959 | |||||||||
| Pv of bond maturity value =450000*0.415521 = 186984 | |||||||||
| PV of interest payments = 9000*11.68959 =105206 | |||||||||
| Issue proceeds of bond = $292190 | |||||||||
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