Question

On January 1, 2018, White, Inc. issues $1,000,000 total face value, 10-yr bonds with an annual stated interest rate of 5%. Interest is paid semi-annually on June 30^th and December 31st. The company received $559,260 upon issuance. The chart below may help, but will not be graded. (Solutions included below; Need Steps to get to the answers)

Period	Cash Paid	Interest Expense	Amortization of Discount/Premium	Unamortized Premium/Discount	Bonds Carrying Value (Book Value)
Issuance	Don’t use	Don’t use	Don’t use
6/30/2018
12/31/2018
6/30/2019

Are the bonds issued at a premium, a discount, or at face value?

What is the (annual) market interest rate at the time of issue?

How much cash is paid to the bondholder on December 31, 2018?

How much Interest Expense would be recorded for 2018?

What would be the Carrying Value of the bonds at June 30, 2019?

On December 31, 2020, when the annual market rate of interest was 6%, White repurchased 10% of these bonds on the open market and retired the debt. What Gain or Loss would White record at that time?

Solutions

1	Discount
2	13.00%
3	25,000
4	73,442
5	595,577
6	30,407.29	Loss

Answer 1

Answer is given below. All answers match to your answers

For No. 6 there is difference in cents only

1 Since Bond issue price is lower than face value bond is issued at Discount Market interest rate is 13% Interest paid to Bond shareholders is 5% for 6 months on $1,000,000 = $25,000 Interest expense for 2018 is $73,442 as per amortisation table below Bond Carrying Value on June 30th, 2019 is $595,577 6 Carrying Value of Bond- 13% Market rate Carrying Value of Bond-6% Market rate Total Loss Loss at 10% $639,446.31 $943,519.63 -$304,073.33 $30,407.33 Slight rounding off difference compared to your answer Working notes Amount PV Discounted factor at Present value 6.50% 0.2838 $283,797 11.0185 $275,463 $559,260 Principal $1,000,000 Interest at 5% 2.5% for 6 months) $25,000 Issue Price of Bond Since Market interest rate is 13%-semi annual will be 6.5%. Present value factor is taken for 6.5% for 20 years Interest is for 10 years and semi-annual basis hence total number of years will be 10 years Amortisation Schedule Semi-annual Interest Dates Cash Paid Interest Expense Issuance 6/30/2018 12/31/2018 6/30/2019 12/31/2019 6/30/2020 12/31/2020 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $36,352 $37,090 $37,876 $38,713 $39,604 $40,553 Bond Amortisation Unamortised of Discount/ Carrying Premium/ Value (Book Premium Discount Value) $440,740 $559,260 $11,352 $429,388 $570,612 $12,090 $417,299 $582,701 $12,876 $404,423 $595,577 $13,713 $390,711 $609,289 $14,604 $376,107 $623,893 $15,553 $360,554 $639,446 Interest expense at the rate of 13% per annum (6.5% for 6 months) is calculated on Bond carrying amount Bond issue and Amortisation table reworked Amount Principal $1,000,000 Interest at 5% 2.5% for 6 months) $25,000 Issue Price of Bond PV Discounted factor at 3% Present value 0.5537 $553,676 14.8775 $371,937 $925,613 Amortisation Schedule at 6% market rate Bond Semi-annual Interest Dates Cash Paid Interest Expense Amortisation of Discount Premium Issuance 6/30/2018 12/31/2018 6/30/2019 12/31/2019 6/30/2020 12/31/2020 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $27,768 $27,851 $27,937 $28,025 $28,116 $28,209 $2,768 $2,851 $2,937 $3,025 $3,116 $3,209 Unamortised Carrying Premium/ Value (Book Discount Value) $74,387 $925,613 $71,619 $928,381 $68,768 $931,232 $65,831 $934,169 $62,806 $937,194 $59,690 $940,310 $56,480 $943,520