ABC Company issued $50 million of 6% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2, and 3 was 8%, 5%, and 2%. Required: a. Determine what ABC would have raised from the bond issue. b. Assume ABC decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization for each of the three years. c. Assume ABC decides to account for the bonds using the fair value method. Determine the interest, unrealized gain/loss, and total expense for each of the three years. d. Explain why the amounts charged to income every year differ under the two methods.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
ABC Company issued $50 million of 6% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2, and 3 was 8%, 5%, and 2%. Required:
a. Determine what ABC would have raised from the bond issue.
b. Assume ABC decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization for each of the three years.
c. Assume ABC decides to account for the bonds using the fair value method. Determine the interest, unrealized gain/loss, and total expense for each of the three years.
d. Explain why the amounts charged to income every year differ under the two methods.
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