Question

14-12 Mont Co. is considering a $400,000 loan for a project.
It presently has total liabilities of $200,000 and total assets of $600,000. 1. Compute Montclair’s (a) present debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $400,000 to fund the project.
14-13 Stanford issues bonds dated 1/1/2017 with a par value of $400,000.
The bonds rate is 9% and interest is paid semiannually on June 30 and December 31.
The bonds mature in three years.
The annual market rate at the date of issuance is 12%.
The bonds are sold for $347,355. 1. What is the amount of the discount on the bonds at issuance? 2. How much bond interest expense will be recognized over the life of the bonds? 3. Prepare an amortization table for these bonds; use the effective interest method to amortize the discount.

Answer 1

14-12		Present (a)	After borrowing (b)
	Total Assets	600000	1000000
	Less: Total Liabilities	200000	600000
	Equity	400000	400000
	Debt to equity ratio	0.5	1.5
	Debt to Equity Ratio = Total Liabilites / Stockholders Equity
	Equity = Total Assets - Total Liabilities
14-13	1) Amount of Discount =	52645	(400000-347355)
	2) Interest Expense to be recognised
	Interest paid	108000	(400000*9%*3)
	Add: Discount amortised	52645
	Total interest to be recognized	160645
	Stanford
	Amortization Table
	$400000, 3 year term Note, 9 % interest rate
	Year	Interest Expense	Interest paid	Amortization of Discount	Carrying Value
	Beg. Jan. 1 , 2017				347,355
	June. 30. 2017	20,841	18,000	2,841	350,196
	Dec 31. 2017	21,012	18,000	3,012	353,208
	June. 30. 2018	21,192	18,000	3,192	356,401
	Dec 31. 2018	21,384	18,000	3,384	359,785
	June. 30. 2019	21,587	18,000	3,587	363,372
	Dec 31. 2019	21,802	18,000	3,802	367,174