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Business Accounting Financial Accounting: Information for Decisions

1. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To determine: The total bond interest expense over the life of bonds. The total bond interest expense over the life of bonds is $131,012. Premium = Issue price − Par value = $ 332 , 988 − $ 320 , 000 = $ 12 , 988 Cash Payment = Par Value × Interest rate × Period = $ 320 , 000 × 9 % × 6 12 = $ 14 , 400 Bond interest expense is computed by multiplying the semi-annual market rate (4%) with the carrying value of previous interest payment date. For instance, as at 30 June 2018, the bond interest expense will be computed as follows: Bond interest expense = Carrying value of previous period × Semi-annual interest rate = $ 332 , 988 × 4 % = $ 13 , 320 For each semi-annual period, there will be amortization of premium of $12,988 (as calculated above) and unamortized premium and carrying value of bond will be reduced to the extent of such amortization so forth and so on. For instance, as at 30 June 2018, the unamortized premium and carrying value will be computed as follows: Unamortized premium = Unamortized premium of previous period − Premium amortization = $ 12 , 988 − $ 1 , 080 = $ 11 , 908 Carrying value = Carrying value of previous period − Premium amortization = $ 332 , 988 − $ 1 , 080 = $ 331 , 908 Semi-annual period end Cash interest payment @4.5% (A) Bond interest expense @4%(B) Premium amortization− (B) Unamortized premium Carrying value 1/1/2018 $12,988 $332,988 30/06/2018 $14,400 $13,320 $1,080 $11,908 $331,908 31/12/2018 $14,400 $13,276 $1,124 $10,784 $330,784 30/06/2019 $14,400 $13,231 $1,169 $9,615 $329,615 31/12/2019 $14,400 $13,185 $1,215 $8,400 $328,400 30/06/2020 $14,400 $13,136 $1,264 $7,136 $327,136 31/12/2020 $14,400 $13,085 $1,315 $5,821 $325,821 30/06/2021 $14,400 $13,033 $1,367 $4,454 $324,454 31/12/2021 $14,400 $12,978 $1,422 $3,032 $323,032 30/06/2022 $14,400 $12,921 $1,479 $1,554 $321,554 31/12/2022 $14,400 $12,846 $1,554 ($0) $320,000 Total $144,000 $131,012 $12,988 2. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To prepare: Theamortization table over bond’s life using effective interest method. Premium = Issue price − Par value = $ 332 , 988 − $ 320 , 000 = $ 12 , 988 Cash Payment = Par Value × Interest rate × Period = $ 320 , 000 × 9 % × 6 12 = $ 14 , 400 Bond interest expense is computed by multiplying the semi-annual market rate (4%) with the carrying value of previous interest payment date. For instance, as at 30 June 2018, the bond interest expense will be computed as follows: Bond interest expense = Carrying value of previous period × Semi-annual interest rate = $ 332 , 988 × 4 % = $ 13 , 320 For each semi-annual period, there will be amortization of premium of $12,988 (as calculated above) and unamortized premium and carrying value of bond will be reduced to the extent of such amortization so forth and so on. For instance, as at 30 June 2018, the unamortized premium and carrying value will be computed as follows: Unamortized premium = Unamortized premium of previous period − Premium amortization = $ 12 , 988 − $ 1 , 080 = $ 11 , 908 Carrying value = Carrying value of previous period − Premium amortization = $ 332 , 988 − $ 1 , 080 = $ 331 , 908 Amortization table over bond’s life using effective interest method Semi-annual period end Cash interest payment @4.5% (A) Bond interest expense @4%(B) Premium amortization− (B) Unamortized premium Carrying value 1/1/2018 $12,988 $332,988 30/06/2018 $14,400 $13,320 $1,080 $11,908 $331,908 31/12/2018 $14,400 $13,276 $1,124 $10,784 $330,784 30/06/2019 $14,400 $13,231 $1,169 $9,615 $329,615 31/12/2019 $14,400 $13,185 $1,215 $8,400 $328,400 30/06/2020 $14,400 $13,136 $1,264 $7,136 $327,136 31/12/2020 $14,400 $13,085 $1,315 $5,821 $325,821 30/06/2021 $14,400 $13,033 $1,367 $4,454 $324,454 31/12/2021 $14,400 $12,978 $1,422 $3,032 $323,032 30/06/2022 $14,400 $12,921 $1,479 $1,554 $321,554 31/12/2022 $14,400 $12,846 $1,554 ($0) $320,000 Total $144,000 $131,012 $12,988 3. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To prepare: The journal Entry to record first two interest payments. Date Journal description Debit Credit 30/06/2018 Interest expense $13,320 Premiumon issue of bonds $1,080 To Cash $14,400 (Being interest expense recorded) 31/12/2018 Interest expense $13,276 Premium on issue of bonds $1,124 To Cash $14,400 (Being interest expense recorded) 4. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To compute: The present value of the remaining cash flows as of December 31, 2020. Given information: No. of remaining periods = 4 Coupon rate (semi-annual) = 4.5% Market rate of interest (semi-annual) = 4% Explanation: Present value of cash flows = Par value × PVIF(4%,4th period ) + Coupon interest × PVIFA(4%,4 periods ) = $ 320 , 000 × ( 0.8548 ) + $ 14 , 400 × ( 3.6298 ) = $ 325 , 807 While the carrying value as per the amortization table for December 31, 2020 is $325,821, the present value calculated as per discounted cash flows method is $325,807 which is almost at par with the carrying value.

1. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To determine: The total bond interest expense over the life of bonds. The total bond interest expense over the life of bonds is $131,012. Premium = Issue price − Par value = $ 332 , 988 − $ 320 , 000 = $ 12 , 988 Cash Payment = Par Value × Interest rate × Period = $ 320 , 000 × 9 % × 6 12 = $ 14 , 400 Bond interest expense is computed by multiplying the semi-annual market rate (4%) with the carrying value of previous interest payment date. For instance, as at 30 June 2018, the bond interest expense will be computed as follows: Bond interest expense = Carrying value of previous period × Semi-annual interest rate = $ 332 , 988 × 4 % = $ 13 , 320 For each semi-annual period, there will be amortization of premium of $12,988 (as calculated above) and unamortized premium and carrying value of bond will be reduced to the extent of such amortization so forth and so on. For instance, as at 30 June 2018, the unamortized premium and carrying value will be computed as follows: Unamortized premium = Unamortized premium of previous period − Premium amortization = $ 12 , 988 − $ 1 , 080 = $ 11 , 908 Carrying value = Carrying value of previous period − Premium amortization = $ 332 , 988 − $ 1 , 080 = $ 331 , 908 Semi-annual period end Cash interest payment @4.5% (A) Bond interest expense @4%(B) Premium amortization− (B) Unamortized premium Carrying value 1/1/2018 $12,988 $332,988 30/06/2018 $14,400 $13,320 $1,080 $11,908 $331,908 31/12/2018 $14,400 $13,276 $1,124 $10,784 $330,784 30/06/2019 $14,400 $13,231 $1,169 $9,615 $329,615 31/12/2019 $14,400 $13,185 $1,215 $8,400 $328,400 30/06/2020 $14,400 $13,136 $1,264 $7,136 $327,136 31/12/2020 $14,400 $13,085 $1,315 $5,821 $325,821 30/06/2021 $14,400 $13,033 $1,367 $4,454 $324,454 31/12/2021 $14,400 $12,978 $1,422 $3,032 $323,032 30/06/2022 $14,400 $12,921 $1,479 $1,554 $321,554 31/12/2022 $14,400 $12,846 $1,554 ($0) $320,000 Total $144,000 $131,012 $12,988 2. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To prepare: Theamortization table over bond’s life using effective interest method. Premium = Issue price − Par value = $ 332 , 988 − $ 320 , 000 = $ 12 , 988 Cash Payment = Par Value × Interest rate × Period = $ 320 , 000 × 9 % × 6 12 = $ 14 , 400 Bond interest expense is computed by multiplying the semi-annual market rate (4%) with the carrying value of previous interest payment date. For instance, as at 30 June 2018, the bond interest expense will be computed as follows: Bond interest expense = Carrying value of previous period × Semi-annual interest rate = $ 332 , 988 × 4 % = $ 13 , 320 For each semi-annual period, there will be amortization of premium of $12,988 (as calculated above) and unamortized premium and carrying value of bond will be reduced to the extent of such amortization so forth and so on. For instance, as at 30 June 2018, the unamortized premium and carrying value will be computed as follows: Unamortized premium = Unamortized premium of previous period − Premium amortization = $ 12 , 988 − $ 1 , 080 = $ 11 , 908 Carrying value = Carrying value of previous period − Premium amortization = $ 332 , 988 − $ 1 , 080 = $ 331 , 908 Amortization table over bond’s life using effective interest method Semi-annual period end Cash interest payment @4.5% (A) Bond interest expense @4%(B) Premium amortization− (B) Unamortized premium Carrying value 1/1/2018 $12,988 $332,988 30/06/2018 $14,400 $13,320 $1,080 $11,908 $331,908 31/12/2018 $14,400 $13,276 $1,124 $10,784 $330,784 30/06/2019 $14,400 $13,231 $1,169 $9,615 $329,615 31/12/2019 $14,400 $13,185 $1,215 $8,400 $328,400 30/06/2020 $14,400 $13,136 $1,264 $7,136 $327,136 31/12/2020 $14,400 $13,085 $1,315 $5,821 $325,821 30/06/2021 $14,400 $13,033 $1,367 $4,454 $324,454 31/12/2021 $14,400 $12,978 $1,422 $3,032 $323,032 30/06/2022 $14,400 $12,921 $1,479 $1,554 $321,554 31/12/2022 $14,400 $12,846 $1,554 ($0) $320,000 Total $144,000 $131,012 $12,988 3. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To prepare: The journal Entry to record first two interest payments. Date Journal description Debit Credit 30/06/2018 Interest expense $13,320 Premiumon issue of bonds $1,080 To Cash $14,400 (Being interest expense recorded) 31/12/2018 Interest expense $13,276 Premium on issue of bonds $1,124 To Cash $14,400 (Being interest expense recorded) 4. Introduction: Bond financing is one of the popular method of raising finance for the company. In bond financing, investors subscribe for the company’s bonds and provide capital to the company and in return they receive coupon payment in the form of interest for a fixed period. The principal amount is returned back to the investors at the redemption/maturity date. To compute: The present value of the remaining cash flows as of December 31, 2020. Given information: No. of remaining periods = 4 Coupon rate (semi-annual) = 4.5% Market rate of interest (semi-annual) = 4% Explanation: Present value of cash flows = Par value × PVIF(4%,4th period ) + Coupon interest × PVIFA(4%,4 periods ) = $ 320 , 000 × ( 0.8548 ) + $ 14 , 400 × ( 3.6298 ) = $ 325 , 807 While the carrying value as per the amortization table for December 31, 2020 is $325,821, the present value calculated as per discounted cash flows method is $325,807 which is almost at par with the carrying value.

Solution Summary: The author explains that bond financing is one of the popular methods of raising finance for the company.

Financial Accounting: Information for Decisions

Financial Accounting: Information for Decisions

8th Edition

ISBN: 9781259533006

Author: John J Wild

Publisher: McGraw-Hill Education

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Chapter 10 Solutions

Financial Accounting: Information for Decisions

Ch. 10 - What is the main difference between notes payable...Ch. 10 - Prob. 2DQ Ch. 10 - Prob. 3DQ Ch. 10 - Prob. 4DQ Ch. 10 - Prob. 5DQ Ch. 10 - Prob. 6DQ Ch. 10 - Prob. 7DQ Ch. 10 - Prob. 8DQ Ch. 10 - Prob. 9DQ Ch. 10 - Prob. 10DQ

Ch. 10 - Prob. 11DQ Ch. 10 - Prob. 12DQ Ch. 10 - Prob. 13DQ Ch. 10 - Prob. 14DQ Ch. 10 - Prob. 15DQ Ch. 10 - Prob. 16DQ Ch. 10 - Prob. 17DQ Ch. 10 - Prob. 18DQ Ch. 10 - Prob. 19DQ Ch. 10 - Prob. 20DQ Ch. 10 - Prob. 1QS Ch. 10 - Prob. 2QS Ch. 10 - Prob. 3QS Ch. 10 - Prob. 4QS Ch. 10 - Prob. 5QS Ch. 10 - Prob. 6QS Ch. 10 - Prob. 7QS Ch. 10 - Prob. 8QS Ch. 10 - Prob. 9QS Ch. 10 - Prob. 10QS Ch. 10 - Prob. 11QS Ch. 10 - Bond features and terminology A2 Enter the letter...Ch. 10 - Prob. 13QS Ch. 10 - Prob. 14QS Ch. 10 - Prob. 15QS Ch. 10 - Prob. 16QS Ch. 10 - Jin Li, an employee of ETrain.com, leases a car at...Ch. 10 - Prob. 18QS Ch. 10 - Prob. 19QS Ch. 10 - Prob. 1E Ch. 10 - Prob. 2E Ch. 10 - Prob. 3E Ch. 10 - Prob. 4E Ch. 10 - Prob. 5E Ch. 10 - Prob. 6E Ch. 10 - Prob. 7E Ch. 10 - Prob. 8E Ch. 10 - Prob. 9E Ch. 10 - Prob. 10E Ch. 10 - Prob. 11E Ch. 10 - Prob. 12E Ch. 10 - Prob. 13E Ch. 10 - Prob. 14E Ch. 10 - Prob. 15E Ch. 10 - Prob. 16E Ch. 10 - Prob. 17E Ch. 10 - Prob. 18E Ch. 10 - Prob. 19E Ch. 10 - Prob. 20E Ch. 10 - Prob. 2PSA Ch. 10 - Prob. 3PSA Ch. 10 - Prob. 4PSA Ch. 10 - Prob. 5PSA Ch. 10 - Prob. 6PSA Ch. 10 - Prob. 7PSA Ch. 10 - Prob. 8PSA Ch. 10 - Prob. 9PSA Ch. 10 - Prob. 10PSA Ch. 10 - Prob. 11PSA Ch. 10 - Straight-Line: Amortization of bond discount Pi P2...Ch. 10 - Prob. 3PSB Ch. 10 - Prob. 4PSB Ch. 10 - Prob. 5PSB Ch. 10 - Prob. 6PSB Ch. 10 - Prob. 7PSB Ch. 10 - Prob. 8PSB Ch. 10 - Prob. 9PSB Ch. 10 - Prob. 10PSB Ch. 10 - Prob. 11PSB Ch. 10 - Prob. 10SP Ch. 10 - Prob. 1BTN Ch. 10 - Prob. 2BTN Ch. 10 - Prob. 3BTN Ch. 10 - Prob. 4BTN Ch. 10 - Access the March 26, 2015, filing of the 10-K...Ch. 10 - Prob. 6BTN Ch. 10 - Prob. 7BTN Ch. 10 - Samsung(Samsung.com), Apple, and Google are...

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