Question

In: Accounting

A. Grove Corporation issued Dh 720,000 of 8% bonds on October 1, 2016, due on October...

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

Solutions

Expert Solution

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.

ekkarill92 answered 1 year ago
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