Question

PART A

Dantonio Corporation issued six-year, 3.5% bonds with a face value of $1,300,000 on 1/1/2018. Interest is paid annually on 12/31. The market rate of interest on 1/1/2018 was 6.0%. Dantonio uses the effective interest rate method (the method covered in class).

Required:

Using Excel, determine the proceeds of the bond sale on 1/1/18.

Using the present value of a dollar table (found in Appendix E of your text), what factor would you use to calculate the present value of the face value of the bond? In other words, what factor would you use to calculate the present value of the $1,300,000 face value that will be paid to the bondholders upon maturity of the bond?

Using the present value of an ordinary annuity table (found in Appendix E of your text), what factor would you use to calculate the present value of the coupon payments?

Demonstrate that the PV amount you get using the factors your identified in #2 and #3 gives you the same proceeds of the bond sale as you calculated using Excel in #1. Note that you might be off by a few cents due to rounding.

Did this bond sell at a premium or discount? In 1-2 sentences explain why it sold at a premium or discount.

Using Excel, prepare a six-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L. Use formulas and reference cells in Excel to show how you calculate your numbers.

Prepare journal entries to record (1) the sale of the bonds on January 1, 2018, (2) the interest payment for the period ended December 31, 2018 and, (3) the final interest and face value payment at maturity on December 31, 2023.

Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2019.

Answer 1

Answer:

Using Excel, determination of the proceeds of the bond sale on 1/1/18:

Maturity = 6 years

Face value = $1,300,000

Coupon rate paid annually = 3.5%

Annual coupon amount = $1,300,000 * 3.5% = $45,500

Market rate of interest = 6%

Using Excel function PV to determine the proceeds of the bond sale :

PV (rate, nper, pmt, fv, type)

PV (6%, 6, -45500, -1300000, 0)

= $1,140,186.96

Using Excel, the proceeds of the bond sale on 1/1/18 = $1,140,186.96

  

Using the present value of a dollar table:

Factor to be used to calculate the present value of the $1,300,000 face value = PV factor at discount rate of 6% for year 6 = 0.70496

Using the present value of an ordinary annuity table:

Factor to be used to calculate the present value of the coupon payments = PV factor from ordinary annuity table (6% for 6 years) = 4.91732

PV amount we would get using the factors = 0.70496 * $1,300,000 + 4.91732 * $45,500 = $1,140,186.06

As we observe above, difference between the PV amount we get using excel and using PV tables = $1,140,186.96 - $1,140,186.06 = 0.90

Difference is 90 cents.

The bond would sell at a discount. The discount is = $1,300,000 - $1,140,186.96 = $159,813.04

The coupon rate of bond is 3.5% whereas market rate of interest is 6%. As market rate is higher at 6%, investors will not buy this bond unless offered at discount since they have alternative investment opportunities which fetche 6%. As such when coupon rate is lower than the market rate of interest, bond would have to be sold as a discount.

Bond amortization schedule:

Above excel with 'show formula':

Journal entries as required:

Balance sheet would report the bond liability and related premium/discount on December 31, 2019 as follow:

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