Question
In: Accounting
Account for Bonds Sold at a Premium The Longo Corporation issued $10 million maturity value of...
Account for Bonds Sold at a Premium
The Longo Corporation issued $10 million maturity value of six percent coupon rate bonds, with interest paid semiannually. At the time of the bond issuance, equivalent risk-related debt instruments carried a yield rate of four percent. The bonds matured in five years.
Round all answers to the nearest whole number.
a. Calculate the proceeds that the Longo Corporation would
receive form the sale of the bonds.
$Answer
b. Calculate the interest expense on the bonds for the first
year.
$Answer
c. Calculate the book value of the bonds at the end of the first year.
Solutions
Expert Solution
interest Amount for semiannual period = face Vqalue * 6% * (6/12)
= 10000000 * 6% * (6/120
= $ 300000
| Face Value of bonds = | $10,000,000 | ||
| market Rate of interest per Annum = | 4% | ||
| no of years = | 5 | ||
| issue Price of the bond | |||
| total values based on | |||
| n = ( 5 years * 2 ) | 10 | ||
| I = ( 4% / 2 ) | 2% | ||
| Cash Flow | Table Value | amount | Present Value ( table Value * Amount ) |
| par Value PVF ( i= 2% , n= 10) | 0.82035 | $10,000,000 | 8203500 |
| interest Annuity PVA ( i= 2% , n= 10) | 8.98259 | 300000 | 2694777 |
| Present Value of Bond | 10898277 | ||
Premium on Bonds = Issue Price - Facevalue
= 10898277 - 10000000
= $ 898277
problem - B
| no | interest for semiannual period ($10m*6%*(6/12)) | Efffctive interest Amount ( 2% * Carrrying Amount of bond ) | premium Amortization | unamotized premium | Bond carrying Amount |
| A | B | C (A-B) | D | E | |
| ( Cash paid ) | Debit(interest expense) | Debit (premium on bonds) | 898277 | 10898277 | |
| 1 | 300000 | 217966 | 82034 | 816243 | 10816243 |
| 2 | 300000 | 216325 | 83675 | 732567 | 10732567 |
interest expense for year 1 = 217966 + 216325
= $ 434290
problem C
Carrying Amount of bonds After 1st year = Carrying Amount - amortized premium for 1 year
= 10898277 - 82034 - 83675
= $ 10732567
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