Question

On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000. The market determined that 10% was the appropriate rate of interest, given the risks that Aumont Company presents to bondholders. The bonds are dated January 1, 2014, mature January 1, 2019, and pay interest on December 31 of each year.

1. Determine the amount that bondholders will pay Aumont for these bonds when the bonds are issued on January 1, 2014.

Present value of the maturity value =

500,000 x [PVSS, n = 5, i = 10%] =

500,000 x .62092 = 310,460

Present value of interest payments =

(500,000 x .12) x [PVOA factor, n = 5, i = 10%] =

60,000 x 3.79079 = 227,447

Price of the bond = total present value of the future cash flows = 310,460 + 227,447 = $537,907

2. Complete the following amortization table for the first two interest payments.

Date	Cash Interest	Effective Interest	Premium Amortization	Carrying Amount
1/1/14				537,907
12/31/14
12/31/15

3. Complete the following financial statements for 2014.

Aumont Company Statement of Cash Flows For the Year Ended December 31, 2014
Operating Activities:
Interest Payments
Financing Activities:
Cash proceeds from issuing bonds

Aumont Company Income Statement For the Year Ended December 31, 2014
Other expenses:
Interest Expense

Aumont Company Balance Sheet December 31, 2014
Assets:	Liabilities:
Cash	Bonds Payable
	Premium
	Equities:
	Retained Earnings

4. Complete the following financial statements for 2015.

Aumont Company Statement of Cash Flows For the Year Ended December 31, 2015
Operating Activities:
Interest Payments

Aumont Company Income Statement For the Year Ended December 31, 2015
Other expenses:
Interest Expense

Aumont Company Balance Sheet December 31, 2015
Assets:	Liabilities:
Cash	Bonds Payable
	Premium
	Equities:
	Retained Earnings

Answer 1

Answer

• All working forms part of the answer

Date	Cash Interest	Effective Interest	Premium Amortization	Carrying Amount
01-01-2014				$             537,907
12/31/14	$                60,000 [500000 x 12%]	$               53,791 [537907 x 10%]	$                 6,209	$             531,698
12/31/15	$                60,000	$               53,170 [531698 x 10%]	$                 6,830	$             524,867

Aumont Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Operating Activities:
Interest Payments	$              (60,000)
Financing Activities:
Cash proceeds from issuing bonds	$              537,907

Aumont Company
Income Statement
For the Year Ended December 31, 2014
Other expenses:
Interest Expense	$               53,791

Aumont Company
Balance Sheet
December 31, 2014
Assets:		Liabilities:
Cash	$        477,907	Bonds Payable	$       500,000
		Premium	$         31,698
				$           531,698
		Equities:
		Retained Earnings	$       (53,791)

Aumont Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Operating Activities:
Interest Payments	$              (60,000)

Aumont Company
Income Statement
For the Year Ended December 31, 2015
Other expenses:
Interest Expense	$               53,170

Aumont Company
Balance Sheet
December 31, 2015
Assets:		Liabilities:
Cash	$        417,907	Bonds Payable	$       500,000
		Premium	$         24,867
				$           524,867
		Equities:
		Retained Earnings	$       (53,170)