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Dean Corp. issued $500,000 of 7% debentures on January 1, 2018, with interest payable semiannually on...

Dean Corp. issued $500,000 of 7% debentures on January 1, 2018, with interest payable semiannually on June 30 and December 31 to yield 6%. The bonds mature in 5 years.

Prepare an amortization table for the bonds. Make sure you provide column headers. Excel would be the best way to prepare this. Write out in pencil your labelled calculations for the first two interest payments.

Write the entries for the first two payments.

Why would the issuer not want to be in this situation?

Solutions

Expert Solution

CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
Step 1 : Calculation of Annual Coupon Payments
Par value of the bond issued is   = $5,00,000 Million
Annual Coupon % 7.00%
Annual Coupon Amount $35,000.00 Million
Semi Annual Coupon Amount $17,500.00 Million
Step 2: Calculate number of years to Maturity
Number of years to maturity = 5 years
Interest is paid semi annyally so total period = 5 Years * 2 = 10 Periods
Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
Market rate of interest or Yield to Maturity or Required Return = 6%
Bonds interest is paid semi annualy means so discounting factor = 6.0 % /2= 3.00 %
PVF = 1 / Discount rate = 1/ 1.03
Result of above will again divide by 1.03 , repeat this lat period
Period Interest Amount (In Million) PVF @ 3.0% PresentValue
1 Interest $17,500                              0.9709 $16,990.29
2 Interest $17,500                              0.9426 $16,495.43
3 Interest $17,500                              0.9151 $16,014.98
4 Interest $17,500                              0.8885 $15,548.52
5 Interest $17,500                              0.8626 $15,095.65
6 Interest $17,500                              0.8375 $14,655.97
7 Interest $17,500                              0.8131 $14,229.10
8 Interest $17,500                              0.7894 $13,814.66
9 Interest $17,500                              0.7664 $13,412.29
10 Interest $17,500                              0.7441 $13,021.64
10 Bond Principal Value $5,00,000                              0.7441 $3,72,046.96
Total $5,21,325.51
Current Bonds Price = $5,21,326
answer =2)
Issue price of the bond= $5,21,326
Par Value of the bonds = $5,00,000
Discount to be amortized = $21,326
Amortized in 10 Equal installment = ($ 21,326 /10 Priods) = $2,132.55
First Payment
Interest Expenses of First Payment $                          17,500
Less : Amortization of Premium $                            1,860
Total interest = $                          15,640
Dece, 31 2014
Interest Expenses of Second Payment $                          17,500
Less : Amortization of Premium $                            1,916
Total interest = $                          15,584
Journal Entries
Transaction Account Title and explanation Debit Credit
First Payment Interest Expenses $                           15,640
Premium on issuance on Bonds $                             1,860
         To Cash $                          17,500
Second Payment Interest Expenses $                           15,584
Premium on issuance on Bonds $                             1,916
         To Cash $                          17,500
Working notes
EFFECTIVE - INTEREST AMORTIZATION SCHEDULE
MARKET RATE OF INTEREST IS 6% AND BOND INTEREST IS 7%
Date Interest payment on face value Interest Expenses (Cash paid - Decrease in Carrying value) Amortization expenses Debit Balance in bond discount Credit Balance in acct payable book Value of the bond
0 01-Jan $0.00 $0.00 $0.00 $21,325.51 $5,00,000.00 $5,21,325.51
1 Jun-30 $17,500.00 $15,639.77 $1,860.23 $23,185.74 $5,00,000.00 $5,19,465.27
2 Dec-31 $17,500.00 $15,583.96 $1,916.04 $25,101.78 $5,00,000.00 $5,17,549.23
3 Dec-31 $17,500.00 $15,526.48 $1,973.52 $27,075.31 $5,00,000.00 $5,15,575.71
4 Dec-31 $17,500.00 $15,467.27 $2,032.73 $29,108.04 $5,00,000.00 $5,13,542.98
5 Dec-31 $17,500.00 $15,406.29 $2,093.71 $31,201.75 $5,00,000.00 $5,11,449.27
6 Dec-31 $17,500.00 $15,343.48 $2,156.52 $33,358.27 $5,00,000.00 $5,09,292.75
7 Dec-31 $17,500.00 $15,278.78 $2,221.22 $35,579.49 $5,00,000.00 $5,07,071.53
8 Dec-31 $17,500.00 $15,212.15 $2,287.85 $37,867.34 $5,00,000.00 $5,04,783.67
9 Dec-31 $17,500.00 $15,143.51 $2,356.49 $40,223.83 $5,00,000.00 $5,02,427.18
10 Dec-31 $17,500.00 $15,072.82 $2,427.18 $42,651.01 $5,00,000.00 $5,00,000.00

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