Question

Accounting or Bonds Sold at a Discount

The Biltmore National Bank raised capital through the sale of $100 million face value of eight percent coupon rate, ten-year bonds. The bonds paid interest semiannually and were sold at a time when equivalent risk-rated bonds carried a yield rate of ten percent.

Round all answers to the nearest whole number.

a. Calculate the proceeds that The Biltmore National Bank received from the sale of the eight percent bonds.
$Answer

b. Calculate the interest expense on the bonds for the first year that the bonds are outstanding.
$Answer

c. Calculate the book value of the bonds at the end of the first year.
$Answer

Answer 1

Table values are based on:
Face Amount	$100,000,000
Interest Payment	$100,000,000*8%*6/12 =$4,000,000
Market Interest rate per period	9.00%
Cash Flow	Table Value(PV of 5% for 20 period)	Amount	Present Value
PV of Interest	12.46221	$40,00,000	$4,98,48,840
PV of Principal	0.37689	$10,00,00,000	$3,76,89,000
PV of Bonds Payable(Issue Price)			$8,75,37,840
Date	Cash Paid($100,000,000*4%)	Interest expenses(Bond carrying amount*5%)	Increase in carrying value	Bond carrying amount
Col I	Col II	Col III	Col IV(Col III - Col II)	Col V
01-Jan-21				$                       8,75,37,840
31-Dec-21	$                                                             40,00,000	$                                                         43,76,892	$                              3,76,892	$                       8,79,14,732
31-Dec-22	$                                                             40,00,000	$                                                         43,95,737	$                              3,95,737	$                       8,83,10,469
a.Proceeds received from sale of Bond =$87,537,840
b.Interest expenses for 1st Year =$4,376,892 + $4,395,737 =$8,772,629 or $8,772,630
c.Book value of Bond at the end of 1st year =$88,310,469
Note:Effective Interest method is used for calculation of Discount amortization