Question

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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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