Question

In: Accounting

A company issues $680,000 of 5% bonds, due in 10 years, with interest payable semiannually on...

A company issues $680,000 of 5% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:

1. The market interest rate is 5% and the bonds issue at face amount.

2. The market interest rate is 4% and the bonds issue at a premium

3. The market interest rate is 6% and the bonds issue at a discount

Solutions

Expert Solution

Case-1
Stated rate of interest: 5%
Market rate of interest: 5%
Par value of bonds 680,000
Issue price 680,000
Semi Annual Interest 17000
(680,000*5%*6/12)
Discount/ Premium on issue Nil
Amortization Table
Date Cash Interest Discount/Premium Unamortized Carrying Value
Interest Expense Amortized Discount/Premium Of bonds
Jan 1Yr1 0 680,000
June30 Yr1 17000 17000 0 0 680,000
Dec31 Yr1 17000 17000 0 0 680,000
June 30 Yr2 17000 17000 0 0 680,000
Case-2
Stated rate of interest: 5%
Market rate of interest: 4%
Par value of bonds 680,000
Semi Annual Interest 17000
(680,000*5%*6/12)
PV factor at 4% for maturity 0.673
Annuity factor for interest 16.351
Present value of maturity 457640
Present value of Interest 277,974
Issue price 735,614
Premium on bonds payable 55,614
Amortization Table
Date Cash Interest Premium Unamortized Carrying Value
Interest Expense Amortized Premium Of bonds
Jan 1Yr1 55614 735,614
June30 Yr1 17000 14712 2288 53326 733,326
Dec31 Yr1 17000 14667 2333 50993 730,993
June 30 Yr2 17000 14620 2380 48613 728,613
Case-3
Stated rate of interest: 5%
Market rate of interest: 6%
Par value of bonds 680,000
Semi Annual Interest 17000
(680,000*5%*6/12)
PV factor at 4% for maturity 0.554
Annuity factor for interest 14.877
Present value of maturity 376720
Present value of Interest 252,909
Issue price 629,629
Discount on bonds payable 50,371
Amortization Table
Date Cash Interest Discount Unamortized Carrying Value
Interest Expense Amortized Discount Of bonds
Jan 1Yr1 50371 629,629
June 30 Yr1 17000 18889 1889 48482 631,518
Dec31 Yr1 17000 18946 1946 46536 633,464
June 30 Yr2 17000 19004 2004 44532 635,468

ekkarill92 answered 1 year ago
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