bonds hw

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Apr 3, 2024

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1. 23Assume there were six independent sales of bonds on January 1 of the current year. The term for all of them is five years. Interest payment dates for all of them are June 30 and Dec 31 of each year. For each of the following, calculate the Bond selling price, the TOTAL interest paid in this first year, and the TOTAL interest expense for this year. A) Face Value $10,000, Face Rate 5%, Market Rate for this Bond issuance at time of sale 6.1%, Amortization Method = Effective Interest Method 10,000 x 5% x ½ yr = $250 (payments) Payments = $250 FV = 10,000 Rate= 3.05 Periods= 10 Proceeds =P.V = $9,532.03 (which is a Discount of 467.97 ) Interest paid this year = $500 (250 + 250) Interest Expense 1 st 6 months = $290.73 (9,532.03 x .061 x ½ yr ) (290.73 interest expense – 250 interest payments = 40.73 discount amortization) Interest Expense 2 nd 6 months = $291.97 ((10,000 – 427.24) x .061 x ½ yr ) Interest Expense This Year = $582.70 (290.73 + 291.97) B) Face Value $40,000, Face Rate 4%, Market Rate for this Bond issuance at time of sale 5.25%, Amortization Method = Effective Interest Method 40,000 x 4% x ½ yr = $800 (payments) Payments = $800 FV = 40,000 Rate= 2.625 Periods= 10 Proceeds =P.V = $37,826.05 (which is a Discount of 2,173.95 ) Interest paid this year = $1,600 (800 + 800) Interest Expense 1st 6 months = $992.93 (37,826.05 x .0525 x ½ yr ) (992.93 interest expense – 800 interest payments = 192.93 discount amortization) Interest Expense 2nd 6 months = $998.00 ((40,000 –1,981.02) x .0525 x ½ yr) Interest Expense This Year = $1990.93 (992.93 + 998.00)

C) Face Value $130,000, Face Rate 5.5%, Market Rate for this Bond issuance at time of sale 4%, Amortization Method = Straight-Line Method 130,000 x 5.5% x ½ yr = $3,575 (payments) Payments = $3,575 FV = 130,000 Rate= 2 Periods= 10 Proceeds =P.V = $138,758.02 (which is a Premium of 8,758.02 ) Interest paid this year = $7,150 (3,575 + 3,575) Premium Amort. Every 6 months = $875.80 (8,758.02 / 10 semiannual periods) Interest Expense 1st 6 months = $2,699.20 (3,575 interest payment – 875.80 premium amort) Interest Expense 2nd 6 months = $2,699.20 (same as 1 st 6 months) Interest Expense This Year = $5,398.40 (2,699.20 + 2,699.20 ) D) Face Value $500,000, Face Rate 0%, Market Rate for this Bond issuance at time of sale 7%, Amortization Method = Straight-Line Method Zero Percent Bonds = NO interest payments FV = 500,000 Rate= 7 Periods= 5 Proceeds =P.V = $356,493.09 (which is a Discount of 143,506.91 ) Interest paid this year = $0 Premium Amort. Every 6 months = $28,701.38 (143,506.91 / 5 years) Interest Expense 1st 6 months = $28,701.38 Interest Expense 2nd 6 months = $28,701.38 Interest Expense This Year = $57,402.76 (28,701.38 + 28,701.38)

E) Face Value $80,000, Face Rate 7%, Market Rate for this Bond issuance at time of sale 6.15%, Amortization Method = Effective Interest Method 80,000 x 7% x ½ yr = $2,800 (payments) Payments = $2,800 FV = 80,000 Rate= 3.075 Periods= 10 Proceeds =P.V = $82,889.20 (which is a Premium of 2,889.20 ) Interest paid this year = $5,600 (2,800 + 2,800) Interest Expense 1st 6 months = $2,548.84 (82,889.20 x .0615 x ½ yr) (2,800 Interest payment – 2,548.84 interest expense = 251.16 prem amortization) Interest Expense 2nd 6 months = $2,541.12 ((80,000 + 2,638.04) x .0615 x ½) Interest Expense This Year = $5,089.96 (2,548.84 + 2,541.12) F) Face Value $100,000, Face Rate 6%, Market Rate for this Bond issuance at time of sale 7.75%, Amortization Method = Straight-Line Method 100,000 x 6% x ½ yr = $3,000 (payments) Payments = $3,000 FV = 100,000 Rate= 3.875 Periods= 10 Proceeds =P.V = $92,858.60 (which is a Discount of 7,141.40 ) Interest paid this year = $6,000 (3,000 + 3,000) Discount Amort. Every 6 months = $714.14 (7,141.40 / 10 semiannual periods) Interest Expense 1st 6 months = $3,714.14 (3,000 interest payment + 714.14 discount amort) Interest Expense 2nd 6 months = $3,714.14 (same as 1 st 6 months) Interest Expense This Year = $7,428.28 (3,714.14 + 3,714.14 )

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2. W Company’s long-term debt at December 31 of Year 1 was as follows:  $60,000 note payable due in Year 2  $225,000 note payable due in Year 4  $300,000 note payable due in Year 6  $45,000 mortgage payable due in five equal installments in Years 2-6  $80,000 note payable due in Year 7 Prepare the required financial statement footnote at December 31, Year 1 indicating the amounts due in each of the next five years and thereafter Note: The following principal payments amounts are due in each of the following five years and thereafter as follows: Year 2 $69,000 Year 3 $9,000 Year 4 $234,000 Year 5 $9,000 Year 6 $309,000 Beyond Year 6 $80,000

3. On December 31, Year 5, P Company had 10-year, $100,000 face value, 10% annual interest rate bonds with a carrying value of $88,800. At the time the bonds were issued, P Company elected to account for the bonds using the fair value option. Before preparing financial statements for Year 5, P Company will have to make an adjusting entry to show the change in the fair value of the bonds. REQUIRED: (a)Assume the fair value of the bonds in $80,000 at December 31, Year 5. The decrease in fair value is due to general interest rates changes due to recent inflation. Record the adjusting entry on December 31, Year 5. Fair Value Adjustment – Bonds 8,800 Unrealized Holding Gain – Income 8,800 (It is a “gain” on the Income Statement because the value of the debt that the new company owes decreased) (Gains/losses due to overall changes in interest rates in the economy go on the INCOME STATEMENT ) (b)Now instead assume that fair value of the bonds is $95,000 at December 31, Year 5. The increase in the fair value of the bonds is due to the face that P Company has strengthened financially and appears less risky to loan money to than before. Record the adjusting entry on December 31, Year 5. Unrealized Holding Gain/Loss – Equity 6,200 Fair Value Adjustment – Bonds 6,200 (It is a “loss” in the Equity section of Balance Sheet because the value of the debt that the company owes increased) (Gains/Losses due to changes in credit worthiness of a business go on the BALANCE SHEET)

4. G Company purchases land on January 1, Year 1, and issues a 3- year, $50,000 zero-interest-bearing note as payment. The market rate of interest is 10% and G Company uses the effective interest method to amortize premiums and discounts. REQUIRED : Calculate the initial value of the note AND prepare an amortization table that has columns for Debit to Interest Expense, Credit to Discount on Notes Payable, End-of-Year Balances of Discount on Notes Payable, and Carrying Value of Bonds. 2 App: since this is a zero-interest bearing note, there are no payments Future Value = 50,000 Rate = 10 Periods = 3 Present Value = $37,565.74 (that means Discount = $12,434.26 (50,000 – 37,565.74)) (FV x FR x T) (CV x MR x T) (PLUG) Discount Bonds Date Cr Cash Dr Int Exp Cr Discount Balance Carry Value 1-1, yr 1 12,434.26 37,565.74 12-31 yr 1 3,756.57 3,756.57 8,677.69 41,322.31 12-31 yr 2 4,132.23 4,132.23 4,545.46 45,454.54 12-31 yr 3 4,545.46 4,545.46 0 50,000,000

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5. On January 1, Year 1, T Company issued a $400,000 of bonds payable with a 10-year life and face rate of 5% payable annually each December 31 and 104 (which means they sold for 104% of face value). These bonds are “callable” which means the company can decide to pay the bonds off early for an agreed-upon price of 101 (which means 101% face value). The company uses straight- line amortization for the premium. After 4 ½ years (which is June 30, Year 5), T Company “calls” the bonds by paying the 101 call price plus any accrued interest since the last interest payment date. REQUIRED : Prepare YEAR 5 journal entries to (a) get an interest expense up to date and (b) record the extinguishment of the debt. Original Premium = $16,000 (4% of 400,000) Straight-Line Amortization of Premium = $1,600 per year (16000/10) Premium Balance at the end of Year 4 = $9,600 (16000 – (1600 x 4)) (a) Journal Entry to get Interest Expense Up to Date Interest Expense 9,200 (PLUG) Premium on Bonds Payable 800 (1,600 x ½ yr) Interest Payable 10,000 (400,000 x .05 x ½ yr) (b) Journal Entry to Call Bonds: Interest Payable 10,000 (balance) Bonds Payable 400,000 (balance) Premium on Bonds Payable 8,800 (balance) Cash 414,000 ((400,000 x 1.01)+ 10,000 interest owed)

Gain on Extinguishment of Debt 4,800 (PLUG) 6. C Company sold $400,000 face value, three-year, 8% face rate bonds dated January 1, Year 1 for a market yield of 10%. The bonds pay interest semiannually. Bond issuance costs incurred were $3,000. What “market” rate of interest would you use to amortize the discount in this situation assuming C Company uses the effective interest method of amortization? Payments = 16,000 Future Value = 400,000 Rate = 5 Periods = 6 Present Value = $379,697.23 Net Proceeds (new PV) = $376,697.23 (379,697.23 - 3,000) Rate = 5.15 semiannual period Annual “market” Rate to use to amortize discount = 10.30%

bonds hw

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