Question

3.     Analyzing and Reporting Financial Statement Effects of Bond Transactions

Assume that on January 1, Comcast issues $500,000 of 5-year, 10% coupon bonds payable, yielding an effective annual interest rate of 8%. Interest is payable semiannually on June 30 and December 31.

A) Compute the issue price.

B)    Complete Comcast’s financial statement effects template for

a. bond issuance.

Answer 1

Price of bond

Coupon amount*(1-(1+r^-n))/r + Face value*(1/(1+r^n)

where r is interest rate and n is number of years

Semi-annual coupon amount

$25,000

500000*(10%/2)

Semi-annual yield

4.00%

(8%/2)

No of payments

10

5*2

Calculation of price of bond is shown below

Price of bond

25000*(1-(1.04^-10)/0.04)+500000*(1/1.04^10)

Price of bond

25000*8.110896+500000*0.675564

Price of bond

$540,554.48

Issue of bond would increase in cash and liability of company, financial statement impact is shown below

Balance sheet

Income statement

Cash asset

+

Non-cash asset

=

Liabilities

+

Contributed capital

+

Earned capital

Revenue

-

Expenses

=

Net income

$540,554.48

$500,000.00

$40,554.48

Premium on bonds payable is reported separately