To determine Complete the given table. Explanation 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. Complete the following table. Case A (7%) Case B (8%) Case C (6%) a. Cash received at issuance $500,000 (1) $466,448 (4) $536,798 (7) b. Interest expense recorded in Year 1 $35,000 (2) $37,316 (5) $32,208 (8) c. Cash paid for interest in Year 1 $35,000 (3) $35,000 (6) $35,000 (9) d. Cash paid at maturity for bond principal $500,000 $500,000 $500,000 Table (1) Working notes: Calculate cash received at issuance for Case A (market interest 7%). Step 1: Calculate the cash interest payment for bonds. Cash interest payment = Face value × Coupon rate × Interest time period = $ 500 , 000 × 7 % × 1 = $ 35 , 000 Step 2: Calculate the present value of cash interest payment. Particulars Amount Interest payment (a) $35,000 PV factor at annual market interest rate of 7% for 10 periods (b) 7.02358 Present value ( a ) × ( b ) $245,825 Table (2) Note: The present value factor for 10 periods at 7% interest would be 7.02358 (Refer Appendix E (Table E.2) in the book for present value factor). Step 3: Calculate the present value of single principal payment of $500,000 (principal amount) at 7% for 10 periods. Particulars Amount Single principal payment (a) $500,000 PV factor at annual market interest rate of 7% for 10 periods (b) 0.50835 Present value ( a ) × ( b ) $254,175 Table (3) Note: The present value factor for 10 periods at 7% interest would be 0.50835 (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 ) = ( $245,825 ( from table 2 ) + $254,175 ( from table 3 ) ) = $500,000 (1) Calculate interest expense recorded in Year 1 for Case A (market interest 7%). Interest expense = Issue price of bonds × Market interest rate × Interest time period = $ 500 , 000 × 7 % × 1 = $ 35 , 000 (2) Calculate cash paid for interest in Year 1 for Case A (market interest 7%). Cash paid for interest = Face value × Coupon rate × Interest time period = $ 500 , 000 × 7 % × 1 = $ 35 , 000 (3) Calculate cash received at issuance for Case B (market interest 8%). Step 1: Calculate the cash interest payment for bonds. Cash interest payment = Face value × Coupon rate × Interest time period = $ 500 , 000 × 7 % × 1 = $ 35 , 000 Step 2: Calculate the present value of cash interest payment. Particulars Amount Interest payment (a) $35,000 PV factor at annual market interest rate of 8% for 10 periods (b) 6.71008 Present value ( a ) × ( b ) $234,853 Table (4) Note: The present value factor for 10 periods at 8% interest would be 6.71008 (Refer Appendix E (Table E.2) in the book for present value factor). Step 3: Calculate the present value of single principal payment of $500,000 (principal amount) at 8% for 10 periods. Particulars Amount Single principal payment (a) $500,000 PV factor at annual market interest rate of 8% for 10 periods (b) 0

10th Edition

ISBN: 9781264094639

Author: Libby

Publisher: MCG

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Chapter 10, Problem 3P

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Complete the given table.

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Chapter 10 Solutions

FINANCIAL ACCOUNTING W/CONNECT PKG

Ch. 10 - Prob. 1Q Ch. 10 - 2. What are the primary characteristics of a bond?...Ch. 10 - 3. What is the difference between an unsecured and...Ch. 10 - 4. Differentiate between a bond indenture and a...Ch. 10 - 5. What is a bond covenant? Ch. 10 - 6. Differentiate between a bond coupon rate and...Ch. 10 - 7. Explain what determines whether a bond is...Ch. 10 - 8. When calculating the present value of a bond’s...Ch. 10 - 9. What is the book value of a bond? Ch. 10 - Prob. 10Q

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