In: Accounting
A. Grove Corporation issued Dh 720,000 of 8% bonds on October 1, 2016, due on October 1, 2021. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.
Instructions
Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method.
DebitCredit | ||||
Credit Cash | Interest Expense | Bond Discount | Carrying amount of bonds | |
October 1 2016 | ||||
April 1 2017 | ||||
October 1 2017 |
B.Amsterdam Antiques reported the following comparative income figures in 2018
2018 | 2017 | |
Net sales |
Dh 630,900 |
Dh 581,400 |
other income | 9000 | 7200 |
639900 | 588600 | |
Costs and expenses: |
||
cost of goods sold | 424800 | 367200 |
selling and general expenses | 158400 | 140400 |
interest | 25200 | 19800 |
608400 | 526500 | |
income before income taxes and
discontinued operations |
31500 | 61200 |
income taxes | (13500) | (27000) |
income before discontinued operations | 18000 | 34200 |
loss from discontinued operations | (16200) | |
Net income | 18000 | 18000 |
Your boss, the president of Amsterdam bank, is concerned about Amsterdam's borrowing capacity. A
representative of Amsterdam Antiques feels that there should be no problem, since net income are the
same with slightly higher sales.
Required:
Compute times interest earned and comment on the bank's position
Requirement A | |||||||
Working Note : | Calculation of issue price of bonds and discount on bonds | ||||||
(Amount in Dh) | |||||||
Year | Cashflows | Discount Factor@5% | Present value | ||||
October 1, 2016 | 1 | ||||||
April 1, 2017 | 28800 | 0.952380952 | 27428.57143 | ||||
October 1, 2017 | 28800 | 0.907029478 | 26122.44898 | ||||
April 1, 2018 | 28800 | 0.863837599 | 24878.52284 | ||||
October 1, 2018 | 28800 | 0.822702475 | 23693.83127 | ||||
April 1, 2019 | 28800 | 0.783526166 | 22565.55359 | ||||
October 1, 2019 | 28800 | 0.746215397 | 21491.00342 | ||||
April 1, 2020 | 28800 | 0.71068133 | 20467.62231 | ||||
October 1, 2020 | 28800 | 0.676839362 | 19492.97363 | ||||
April 1, 2021 | 28800 | 0.644608916 | 18564.73679 | ||||
October 1, 2021 | 28800 | 0.613913254 | 17680.7017 | ||||
October 1, 2021 | 720000 | 0.613913254 | 442017.5425 | ||||
Issue price of the bonds (A) | 664403.51 | ||||||
Discount on bonds (B-A) | 55596.49 | ||||||
Face Value of Bonds (B) | 720000 | ||||||
Your Requirement A answered | Amortization schedule for the dates indicated with effective interest method | ||||||
(Amount in Dh) | |||||||
Year | Credit Cash | Interest expense | Bond Discount | Carrying value of bonds | |||
October 1, 2016 | 664403.51 | ||||||
April 1, 2017 | 28800 | 33220.17543 | 4420.175425 | 668823.68 | |||
October 1, 2017 | 28800 | 33441.1842 | 4641.184197 | 673464.87 | |||
April 1, 2018 | 28800 | 33673.24341 | 4873.243407 | 678338.11 | |||
October 1, 2018 | 28800 | 33916.90558 | 5116.905577 | 683455.02 | |||
April 1, 2019 | 28800 | 34172.75086 | 5372.750856 | 688827.77 | |||
October 1, 2019 | 28800 | 34441.3884 | 5641.388399 | 694469.16 | |||
April 1, 2020 | 28800 | 34723.45782 | 5923.457819 | 700392.61 | |||
October 1, 2020 | 28800 | 35019.63071 | 6219.630709 | 706612.24 | |||
April 1, 2021 | 28800 | 35330.61224 | 6530.612245 | 713142.86 | |||
October 1, 2021 | 28800 | 35657.14286 | 6857.142857 | 720000.00 | |||
(Amount in Dh) | |||||||
Requirement B | Year | 2018 | 2017 | ||||
Earning before interest & Taxes | A | 31500 | 61200 | ||||
Interest Expense | B | 25200 | 19800 | ||||
Times interest earned | A/B | 1.25 | 3.09 | ||||
Comments : President of Amsterdam bank is rightly concerned about the borrowing capacity | |||||||
of the Amsterdem Antiques, as the repayment capacity of interest has fallen sharply in the | |||||||
current year compared to last year, which can be evidenced from decreased times interest earned | |||||||
ratio of the Amsterdem Antiques. |