Question
In: Accounting
A firm has $8,000,000 of 9.5% 25 year bonds dated May 1, 2015 with interest payable...
A firm has $8,000,000 of 9.5% 25 year bonds dated May 1, 2015 with interest payable on April 30 and October 31. The corporation’s fiscal year ends on December 31, and it uses the straight line method to amortize bond premiums. Assume the bonds are issued at 103.5 on May 1, 2015.
What would be the “carrying value” of the bonds as of April 30, 2016 (one year later)?
Solutions
Expert Solution
Face Value = $8,000,000
Issue Price = 103.50% * $8,000,000
Issue Price = $8,280,000
Premium on Bonds = Issue Price - Face Value
Premium on Bonds = $8,280,000 - $8,000,000
Premium on Bonds = $280,000
Annual Coupon Rate = 9.5%
Semiannual Coupon Rate = 4.75%
Semiannual Coupon = 4.75% * $8,000,000
Semiannual Coupon = $380,000
Time to Maturity = 25 years
Semiannual Period to Maturity = 50
Semiannual Amortization of Premium = Premium on Bonds /
Semiannual Period to Maturity
Semiannual Amortization of Premium = $280,000 / 50
Semiannual Amortization of Premium = $5,600
Carrying Value, October 31, 2015 = Issue Price - Semiannual
Amortization of Premium
Carrying Value, October 31, 2015 = $8,280,000 - $5,600
Carrying Value, October 31, 2015 = $8,274,400
Carrying Value, April 30, 2016 = Carrying Value, October 31,
2015 - Semiannual Amortization of Premium
Carrying Value, April 30, 2016 = $8,274,400 - $5,600
Carrying Value, April 30, 2016 = $8,268,800
So, carrying value of the bonds as of April 30, 2016 is $8,268,800
ekkarill92 answered 1 year agoRelated Solutions
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