Concept explainers
Videos
1.
Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
To Identify: If the market rate is 6%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.
1.
Answer to Problem 9.6E
The bond issue at a premium and price of the bonds is $27,934.071.73.
Explanation of Solution
Stated interest rate (7%) is greater than the market interest rate (6%) means, the bonds issue at a premium.
Working notes:
Calculate the present value of face value of principal.
| Particulars | Amount ($) |
| Face | $26,000,000 |
| PV factor at an annual market rate of 3% for 20 periods (b) |
|
| Present value of face value of principal
| $14,395,569.61 |
Note: The present value of $1 for 20 periods at 3% is 0.55368 (refer Table 2 in Appendix).
Calculate present value of interest payments.
| Particulars | Amount ($) |
| Interest payments amount (a) | $910,000 |
| PV factor at an annual market rate of 3% for 20 periods (b) |
|
| Present value of interest payments
| $13,538,502.12 |
Note: The Present value of an ordinary annuity of $1 for 20 periods at 3% is 14.87747 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
Therefore, price of the bonds is $27,934.071.73.
2.
To Identify: If the market rate is 7%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.
2.
Answer to Problem 9.6E
The bond issue at a par and price of the bonds is $26,000,000.
Explanation of Solution
Stated interest rate (7%) is equal to the market interest rate (7%) means, the bonds issue at a par.
Working notes:
Calculate the present value of face value of principal.
| Particulars | Amount ($) |
| Face value of bonds (a) | $41,000,000 |
| PV factor at an annual market rate of 3.5% for 20 periods (b) |
|
| Present value of face value of principal
| $13,066,713 |
Note: The present value of $1 for 20 periods at 3.5% is 0.17193 (refer Table 2 in Appendix).
Calculate present value of interest payments.
| Particulars | Amount ($) |
| Interest payments amount (a) | $910,000 |
| PV factor at an annual market rate of 3.5% for 20 periods (b) |
|
| Present value of interest payments
| $12,933,287 |
Note: The Present value of an ordinary annuity of $1 for 20 periods at 3.5% is 14.21240 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
Therefore, price of the bonds is $26,000,000.
3.
To Identify: If the market rate is 8%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.
3.
Answer to Problem 9.6E
The bond issue at a discount and price of the bonds is $24,233,257.58.
Explanation of Solution
Stated interest rate (7%) is equal to the market interest rate (8%) means, the bonds issue at a discount.
Working notes:
Calculate the present value of face value of principal.
| Particulars | Amount ($) |
| Face value of bonds (a) | $26,000,000 |
| PV factor at an annual market rate of 4% for 20 periods (b) |
|
| Present value of face value of principal
| $11,866,060.60 |
Note: The present value of $1 for 20 periods at 4% is 0.45639 (refer Table 2 in Appendix).
Calculate present value of interest payments.
| Particulars | Amount ($) |
| Interest payments amount (a) | $910,000 |
| PV factor at an annual market rate of 4% for 20 periods (b) |
|
| Present value of interest payments
| $12,367,196.97 |
Note: The Present value of an ordinary annuity of $1 for 20 periods at 4% is 13.59033 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
Therefore, price of the bonds is $24,233,257.58.
Want to see more full solutions like this?
Chapter 9 Solutions
Financial Accounting
- The Fantastic Ice Cream Shoppe sold 9,000 servings of ice cream during June for $4 per serving. The shop purchases the ice cream in large tubs from the Dream Ice Cream Company. Each tub costs the shop $9 and has enough ice cream to fill 20 ice cream cones. The shop purchases the ice cream cones for $0.10 each from a local warehouse club. Located in an outdoor mall, the rent for the shop space is $2,050 per month. The shop expenses $290 a month for the depreciation of the shop's furniture and equipment. During June, the shop incurred an additional $2,700 of other operating expenses (75% of these were fixed costs).arrow_forwardHello tutor please provide correct answer general accounting questionarrow_forwardRobinson Manufacturing discovered the following information in its accounting records: $519,800 in direct materials used, $223,500 in direct labor, and $775,115 in manufacturing overhead. The Work in Process Inventory account had an opening balance of $72,400 and a closing balance of $87,600. Calculate the company’s Cost of Goods Manufactured.arrow_forward
- Sanjay would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 16 percent annual before-tax return on a $350,000 investment. Sanjay’s marginal tax rate is 24 percent and the corporate tax rate is 21 percent. Sanjay’s marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, the business income allocation would qualify for the deduction for qualified business income (assume no limitations on the deduction). Assume Sanjay does not owe any additional Medicare tax or net investment income tax. Required 1. For each scenario, C corporation and S corporation, calculate the total tax (entity level and owner level). 2. For each scenario, C corporation and S corporation, calculate the effective tax rate. C Corporation S Corporation 1. Total tax…arrow_forwardI need correct solution of this general accounting questionarrow_forwardHii expert please given correct answer general accountingarrow_forward
- Markowis Corp has collected the following data concerning its maintenance costs for the pest 6 months units produced Total cost July 18,015 36,036 august 37,032 40,048 September 36,036 55,055 October 22,022 38,038 November 40,040 74,575 December 38,038 62,062 Compute the variable coot per unit using the high-low method. (Round variable cost per mile to 2 decimal places e.g. 1.25) Compute the fixed cost elements using the high-low method.arrow_forwardUse the following data to determine the total dollar amount of assets to be classified as current assets. Marigold Corp. Balance Sheet December 31, 2025 Cash and cash equivalents Accounts receivable Inventory $67000 Accounts payable $126000 86500 Salaries and wages payable 11100 149000 Bonds payable 161500 Prepaid insurance 83000 Total liabilities 298600 Stock investments (long-term) 193000 Land 199500 Buildings $226000 Common stock 309400 Less: Accumulated depreciation (53500) 172500 Retained earnings 475500 Trademarks 133000 Total stockholders' equity 784900 Total assets $1083500 Total liabilities and stockholders' equity $1083500 ○ $269100 $385500 ○ $236500 ○ $578500arrow_forwardShould the machine be replaced?arrow_forward
- Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $39700 Net income $52100 Current liabilities 19800 Stockholders' equity 96700 Average assets 198400 Total liabilities 52100 Total assets 148800 Average common shares outstanding was 18600. ○ $9900 ○ $39700 ○ $19900 ○ $12400arrow_forwardSuppose that Old Navy has assets of $4265000, common stock of $1018000, and retained earnings of $659000. What are the creditors' claims on their assets? ○ $2588000 ○ $3906000 ○ $1677000 ○ $4624000arrow_forwardBrody Corp. uses a process costing system. Beginning inventory for January consisted of 1,400 units that were 46% completed. 10,300 units were started during January. On January 31, the inventory consisted of 550 units that were 77% completed. How many units were completed during the period?arrow_forward
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning