In: Accounting
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?
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 | |