Question

P12-4 f,g,h

er D - cond case payment a l entry required Perth income teme after acquiring the Cola's ability Prethany mind to record the What the end of the capital se on Coca-Cola was d i t ratio immediately to the par pact of these agreement on Coca fevalue. 896 coupon, love love Yield 1 crest stays at on . The d SOLO celue, 8c interessemiannually and were . Assume that the market rate of inter P12-4 Or Car The hands ing prices ads to sell at a discount. Rewind Explain what factors would cause the bonds to sell at a dis Interest Expense Coupon Payment Amortu be entry that O'Brien made to record the sale of the bom Design an Excel spreadsheet to complete the following schedule Beginning Balance To From 1/1/01 6/30/01 7/1/01 12/31/01 6/30/02 771/02 12/31/02 1/1/03 7/1/03 12/31/03 1/1/04 6/30/04 7/1/04 12/31/04 1/1/05 12/31/05 1/1/02 6/30/03 6/30/05 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08 6/30/09 12/31/09 7/1/09 1/1/10 7/1/10 6/30/10 12/31/10 d. Prepare the entry to record the first interest payment on June 30, 2001, e. Show how the bonds would be presented on O'Brien's balance sheet at Dec 2001. balance sheet at December 31,

Answer 1

Solution P12-4

Answer A

Bonds are issued at discount when the market interest rate exceeds the coupon rate of the bond. In this case the market rate being 10% exceeds the coupon rate which is 8%. Therefore, the bond is issued at a discount of $12,462.

Answer B

$ 100,000 Dr Bank A/C Cr 8% Bonds Cr Unamortized Discount (To Record Issue of Bonds at a discount) $ $ 87,538 12,462

Answer C

Ammortization Schedule From To Beginning Balance Interest Expense at 5% Coupon Payment @4% 2 3 4=2*5% 5 = $100,000*4% 1/1/2001 6/30/2001 $ 87,538 $ 4,377 $ 4,000 1/7/2001 12/31/2001 $ 87,915 $ 4,396 $ 4,000 1/1/2002 6/30/2002 $ 88,311 $ 4,416 $ 4,000 1/7/2002 12/31/2002 $ 88,726 $ 4,436 $ 4,000 1/1/2003 6/30/2003 $ 89,162 $ 4,458 $ 4,000 1/7/2003 12/31/2003 $ 89,621 $ 4,481 $ 4,000 1/1/2004 6/30/2004 $ 90,102 $ 4,505 $ 4,000 1/7/2004 12/31/2004 $ 90,607 $ 4,530 $ 4,000 1/1/2004 6/30/2005 $ 4,557 $ 4,000 1/7/2005 12/31/2005 $ 91,694 $ 4,585 $ 4,000 1/1/2005 6/30/2006 $ 92,279 $ 4,614 $ 4,000 1/7/2006 12/31/2006 $ 92,893 $ 4,645$ 4,000 1/1/2006 6/30/2007 $ 4,677 $ 4,000 1/7/2007 12/31/2007 $ 94,214 $ 4,711 $ 4,000 1/1/2007 6/30/2008 $ 94,925 $ 4,746 $ 4,000 1/7/2008 12/31/2008 $ 95,671 $ 4,784 $ 4,000 1/1/2008 6/30/2009 $ 96,455 $ 4,823 $ 4,000 1/7/2009 12/31/2009 $ 97,277 $ 4,864 $ 4,000 1/1/2009 6/30/2010 $ 98,141 $ 4,907 $ 4,000 1/7/2010 12/31/2010 $ 99,048 $ 4,951 $ 4,000 Discount Ammortization closing Balance 6 = 4-5 7 = 3+6 $ 377 $ 87,915 $ 396 $ 88,311 $ 416 $ 88,726 $ 436 $ 89,162 $ 458 $ 89,621 $ 481 $ 90,102 $ 505 $ 90,607 $ 530 $ 91,137 $ 557 $ 91,694 $ 585 $ 92,279 $ 614 $ 92,893 $ 645 $ 93,537 $ 677 $ 94,214 $ 711$ 94,925 $ 746 $ 95,671 $ 784 $ 96,455 $ 823 $ 97,277 $ 864 $ 98,141 $ 907 $ 99,048 $ 951 $ 100,000

Answer D

Dr Interest Expense A/C $ 4,000 Dr Unamortized Discount $ 377 Cr 8% Bonds A/C (To Record Interest and discount charged to Bonds) $ 4,377 Dr 8% Bonds A/C $ 4,000 Cr Bank A/C (To Record first Interest payment made on 30th June) $ 4,000

Answer E

Liabilities Amount 8% Bonds $ 88,311 Unamortized Discount on Issue of Bonds $ 11,689 Total $ 100,000

Answer F

Economic Value of the Bond as 31 Dec 2001 Period Cash Flow PVF @ 5% Discounted Cashflow 11 $ 4,000 0.952 $ 3,810 21 $ 4,000 0.907 $ 3,628 31 $ 4,000 0.864 $ 3,455 4 $ 4,000 0.823 $ 3,291 5 $ 4,000 0.784 $ 3,134 6 $ 4,000 0.746 $ 2,985 7 $ 4,000 0.711 $ 2,843 8 $ 4,000 0.677 $ 2,707 9 $ 4,000 0.645 $ 2,578 10 $ 4,000 0.614 $ 2,456 11 $ 4,000 0.585 $ 2,339 12$ 4,000 0.557 $ 2,227 13 $ 4,000 0.530$ 2,121 14 $ 4,000 0.505 $ 2,020 15 $ 4,000 0.481 $ 1,924 16 $ 4,000 0.458 $ 1,832 17 $ 4,000 0.436 $ 1,745 18 $ 104,000 0.416 $ 43,214 Total 88,310

ANSWER G The Economic Value of the Bond as on 31 Dec 2011 would be "NIL" because the all the interest payments as on this date have already been made. However, the liablity would be $100,000 which is the redemption value ANSWER H Dr 8% Bonds A/C $ 100,000 Cr Bank A/C $100,000 (To Record the redemption of Bonds on maturity Date)

Solution P12-5

ANSWER A Economic Value of the Bond as 30 June 2009 Period Cash Flow PVF @ 6% Discounted Cashflow 1 $ 4,000 0.943 $ 3,774 $ 4,000 0.890 $ 3,560 3 $ 104,000 0.840 $ 87,320 Total 94,654