The company has issued a bond with a £20,000,000 par value. It has 4 year maturity with a coupon of 2% paid annually. The cost associated with issuing the bond is £95,000 and the market interest rate at the time of issue was 3.5%. The company’s reporting period is 1 January to 31 December. With regards to the bond in situation 2, assuming the company chooses the effective interest rate method and the bond is issued on 1 January 2019: Calculate the initial effect on the balance sheet of the issuance. Calculate the ending carrying value, interest expense and cash flow effect on the financial statement, for each of the following four years (ignore the costs associated with issuing the bond). Calculate the same figures if the company had accounted for this, bond using the straight line method (ignore the costs associated with issue).
The company has issued a bond with a £20,000,000 par value. It has 4 year maturity with a coupon of 2% paid annually. The cost associated with issuing the bond is £95,000 and the market interest rate at the time of issue was 3.5%. The company’s reporting period is 1
January to 31 December.
With regards to the bond in situation 2, assuming the company chooses the effective interest rate method and the bond is issued on 1 January 2019:
Calculate the initial effect on the
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