Financial Accounting
Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Chapter 10, Problem 10.6AP

1.

To determine

Calculate the issuance price of the bonds on January 1 of this Year.

1.

Expert Solution
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Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

Determine the issuance price of the bonds.

Step 1: Calculate the cash interest payment for bonds.

Cash interest payment=Face value×Coupon rate×Interest time period=$4,000,000×9%×1=$360,000

Step 2: Calculate the present value of cash interest payment.

ParticularsAmount
Interest payment (a)$120,000
PV factor at annual market interest rate of 6% for 5 periods (b)4.21236
Present value (a)×(b)$1,516,450

Table (1)

Note: The present value factor for 5 periods at 6% interest would be 4.21236 (Refer Appendix E (Table E.2) in the book for present value factor).

Step 3: Calculate the present value of single principal payment of $4,000,000 (principal amount) at 6% for 5 periods.

ParticularsAmount
Single principal payment (a)$4,000,000
PV factor at annual market interest rate of 6% for 5 periods (b)0.74726
Present value (a)×(b)$2,989,040

Table (2)

Note: The present value factor for 5 periods at 6% interest would be 0.74726 (Refer Appendix E (Table E.1) in the book for present value factor).

Step 4: Calculate the issue price of the bonds.

Issue price of the bonds =(Present value of interest payment + Present value of single principal payment)=($1,516,450(from table 1)+$2,989,040(from table 2))  =$4,505,490

Conclusion

Hence, the issuance price of the bonds on January 1 of this Year is $4,505,490.

2.

To determine

Calculate the amount of interest expense that should be recorded on December 31 of this year.

2.

Expert Solution
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Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.

Calculate the amount of interest expense that that should be recorded on December 31 of this year.

Interest expense=(Book value of bond (issue price)×Market interest rate×Interesttime period)= $4,505,490×6%×1=$270,329

Conclusion

Hence, amount of interest expense that should be recorded on December 31 of this year is $270,329.

To determine

Calculate the amount of interest expense that should be recorded on December 31 of next year.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.

Calculate the amount of interest expense that that should be recorded on December 31 of next year.

Interest expense=(Book value of bond ×Market interest rate×Interesttime period)($4,505,490($360,000$270,329))×6%×1=$264,949

Conclusion

Hence, amount of interest expense that should be recorded on December 31 of next year is $264,949.

3.

To determine

Calculate the amount of cash that should be paid on December 31 of this year.

3.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Calculate the amount of cash that should be paid on December 31 of this year.

Cash paid=(Face value of bond ×coupon rate×Interesttime period)= $4,000,000×9%×1=$360,000

Conclusion

Hence, amount of cash that should be paid on December 31 of this year is $360,000.

To determine

Calculate the amount of cash that should be paid on December 31 of next year.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Calculate the amount of cash that should be paid on December 31 of next year.

Cash paid=(Face value of bond ×coupon rate×Interesttime period)= $4,000,000×9%×1=$360,000

Conclusion

Hence, amount of cash that should be paid on December 31 of next year is $360,000.

4.

To determine

Calculate the book value of the bonds on December 31 of this year.

4.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Determine the book value of the bonds on December 31 of this year.

Book value of bond on December 31 of this year) =(Beginning book value of bondsPremium amortized on December 31 of this year)=($4,505,490($360,000$270,329))=$4,415,819

Conclusion

Hence, the book value of the bonds on June 30 of this year is $4,415,819.

To determine

Calculate the book value of the bonds on December 31 of next year.

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Determine the book value of the bonds on December 31 of next year.

Book value of bond on December 31of next year) =(Beginning book value of bondsPremium amortized on December 31 of this yearPremium amortized on December 31 of next year)=($4,505,490($360,000$270,329)($360,000$264,949))=$4,320,768

Conclusion

Hence, the book value of the bonds on December 31 of next year is $4,320,768.

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Chapter 10 Solutions

Financial Accounting

Ch. 10 - Prob. 11QCh. 10 - Prob. 12QCh. 10 - Prob. 1MCQCh. 10 - Prob. 2MCQCh. 10 - Prob. 3MCQCh. 10 - Prob. 4MCQCh. 10 - Prob. 5MCQCh. 10 - Prob. 6MCQCh. 10 - Prob. 7MCQCh. 10 - Prob. 8MCQCh. 10 - Prob. 9MCQCh. 10 - Prob. 10MCQCh. 10 - Prob. 10.1MECh. 10 - Computing the Price of a Bond Issued at Par LO10-2...Ch. 10 - Understanding Financial Ratios 0-3, 10-6 The...Ch. 10 - Computing the Times Interest Earned Ratio LO10-3...Ch. 10 - Computing the Price of a Bond Issued at a Discount...Ch. 10 - Recording the Issuance and Interest Payments of a...Ch. 10 - Prob. 10.7MECh. 10 - Prob. 10.8MECh. 10 - Prob. 10.9MECh. 10 - Prob. 10.10MECh. 10 - Prob. 10.11MECh. 10 - Prob. 10.12MECh. 10 - Prob. 10.13MECh. 10 - Prob. 10.14MECh. 10 - Prob. 10.1ECh. 10 - Prob. 10.2ECh. 10 - Prob. 10.3ECh. 10 - Computing Issue Prices of Bonds Sold at Par, at a...Ch. 10 - Prob. 10.5ECh. 10 - Prob. 10.6ECh. 10 - Prob. 10.7ECh. 10 - Prob. 10.8ECh. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 10.10ECh. 10 - Prob. 10.11ECh. 10 - Explaining Why Debt Is Issued at a Price Other...Ch. 10 - Prob. 10.13ECh. 10 - Prob. 10.14ECh. 10 - Prob. 10.15ECh. 10 - Prob. 10.16ECh. 10 - Prob. 10.17ECh. 10 - Prob. 10.18ECh. 10 - Prob. 10.19ECh. 10 - Prob. 10.20ECh. 10 - Prob. 10.21ECh. 10 - Prob. 10.22ECh. 10 - Prob. 10.23ECh. 10 - Prob. 10.24ECh. 10 - Prob. 10.1PCh. 10 - Prob. 10.2PCh. 10 - Comparing Bonds Issued at Par, at a Discount, and...Ch. 10 - Prob. 10.4PCh. 10 - Prob. 10.5PCh. 10 - Recording and Reporting Bonds Issued at a Discount...Ch. 10 - Recording and Reporting a Bond Issued at a...Ch. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - Prob. 10.13PCh. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.1APCh. 10 - Prob. 10.2APCh. 10 - Prob. 10.3APCh. 10 - Prob. 10.4APCh. 10 - Prob. 10.5APCh. 10 - Prob. 10.6APCh. 10 - Recording and Reporting a Bond Issued at a Premium...Ch. 10 - Prob. 10.8APCh. 10 - Prob. 10.1CONCh. 10 - Prob. 10.1CPCh. 10 - Prob. 10.2CPCh. 10 - Prob. 10.3CPCh. 10 - Prob. 10.4CPCh. 10 - Prob. 10.5CPCh. 10 - Evaluating an Ethical Dilemma LO 10-1 Assume that...
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