Question

PART A Sparty Corporation issued five-year, 8% bonds with a total face value of $500,000 on January 1, 2019. Interest is paid annually on December 31. The market rate of interest on this date was 6%. Sparty uses the effective interest rate method. Required: 1. Using Excel, determine the proceeds of the bond sale on 1/1/19. 2. Using the present value of a dollar table (found in Appendix E of your text), what factor would you use to calculate the present value of the face value of the bond? 3. Using the present value of an ordinary annuity table (found in Appendix E of your text), what factor would you use to calculate the present value of the coupon payments? For your own benefit, you may want to demonstrate that the price of the bonds is the same using the factors from the table that you got in Excel. 4. Did this bond sell at a premium or discount? 5. Using Excel, prepare a five-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L. Use formulas and reference cells in Excel to show how you calculate your numbers.

Answer 1

Requirement 1:

Present value of the coupon payments	$168,494
[$40,000 x 4.21236 present value annuity factor (6%, 5 years)
Present value of the face value	$373,630
[$500,000 x 0.74726 present value factor (6%, 5 years)
Proceeds of the bonds	$542,124

*Coupon payments = $500,000 x 8% = $40,000

Requirement 2:

Factor used for face value: Present value factor at 6% for 5 years is 0.74726

Requirement 3:

Present value annuity factor used for coupon payments: Present value annuity factor at 6% for 5 years is 4.21236

Requirement 4:

Issue price is more than the face value. So that bonds issued at premium.

Requirement 5:

Bonds Amortization Table

Year	Cash paid	Interest expense	Discount amortized	Carrying value
1/1/2019				$542,124
12/31/2019	$40,000	$32,527	$7,473	$534,652
12/31/2020	$40,000	$32,079	$7,921	$526,731
12/31/2021	$40,000	$31,604	$8,396	$518,335
12/31/2022	$40,000	$31,100	$8,900	$509,435
12/31/2023	$40,000	$30,565	$9,435	$500,000