Question

L. Red Cub Corp. issued $700,000, 10 % bonds on January 1, 2018 when the market rate was 12%. The fifteen year bonds pay interest semiannually on June 30 and December 31 and interest is amortized using the effective interest method. Fiscal year end is 12/31. (Use effective interest and SHOW your amortization table). How much cash (proceeds) did Red Cub Corp. receive on January 1, 2018? a. The amount of interest accrued in fiscal year 2018 was? b. What is the book value of this liability on Dec. 31, 2018? с.

Answer 1

a) Semiannual yield rate, RATE # of semiannuals to maturity, NPER Semiannual coupon payment, PMT Maturity value at the end, FV Semiannual coupon type, TYPE Cash proceeds from bonds issued 6% [12% / 2; Annual market rate is converted into semiannual rate] 30 (15 years x 2; As there will be 2 semiannuals in a year] $35,000 ($700,000 x 10% / 2] $700,000 [Face value of the bonds] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $603,646 [Ref: NOTE] NOTE: Cash proceeds from bonds issued is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=6%; nper=30; pmt=-35000; fv=-700000; type=0; Here, value for pmt & fv are negative as they denote cash inflows; type = 0 because coupons paid at the end of each semiannual only. А 1 Semiannual yield rate, RATE =12%/2 (12% / 2; Annual market rate is converted into semiannual rate] 2 # of semiannuals to maturity, NPER =15*2 [15 years x 2; As there will be 2 semiannuals in a year] 3 Semiannual coupon payment, PMT =700000*10%/2 ($700,000 x 10% / 2] 4. Maturity value at the end, FV $700,000 [Face value of the bonds] 5 Semiannual coupon type, TYPE 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. 6 Cash proceeds from bonds issued =PV(B1,B2,-B3,-B4,B5) [Ref: NOTE]

b) Interest accrued on Jun. 30, 2018 Interest accrued on Dec. 31, 2018 Interest arrued for fiscal year 2018 $36,219 $36,292 $72,511 [Ref: Interest expense for Semiannual-1] [Ref: Interest expense for Semiannual-2] ($36219 + $36292] c) Book value of this liability as at Dec. 31, 2018 $606,157 [Ref: Bond's carrying value at the end of Semiannual-2] Workings: Semiannual period (2) (Discount balance = $700000 - $603646] OHNM + no Bond Amortization Table (Effective interest rate method) Bond's Semiannual Interest @ Discount Discount beginning coupon 5% on amortized balance balance payments Beginning (4) = (3)-(2) (5) = (5)-(4) (1) Bond bal. (3) $96,354 $603,646 $35,000 $36,219 $1,219 $95,135 $604,865 $35,000 $36,292 $1,292 $93,843 $606,157 $35,000 $36,369 $1,369 $92,474 $607,526 $35,000 $36,452 $1,452 $91,022 $608,978 $35,000 $36,539 $1,539 $89,483 $610,517 $35,000 $36,631 $1,631 $87,852 $612,148 $35,000 $36,729 $1,729 $86,123 $613,877 $35,000 $36,833 $1,833 $84,290 Bond's Carrying value (6)=(6)+(4) $603,646 $604,865 $606,157 $607,526 $608,978 $610,517 $612,148 $613,877 $615,710 00

99uuBHSBHB994284四四四%99 $615,710 $617,653 $619,712 $621,895 $624,209 $626,662 $629,262 $632,018 $634,939 $638,035 $641.317 $644,796 $648,484 $652,393 $656,537 $660,929 $665,585 $670,520 $675,751 $681296 $687.174 $693,404 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 $36,943 $37,059 $37,183 $37.314 $37,453 $37,600 $37,756 $37,921 $38,096 $38,282 $38,479 $38,688 $38,909 $39.144 $39,392 $39,656 $39,935 $40,231 $40,545 $40,878 $41,230 $41,604 $1,943 $2,059 $2.183 $2,314 $2,453 $2,600 $2,756 $2,921 $3,096 $3,282 $3,479 $3,688 $3,909 $4,144 $4,392 $4,656 $4,935 $5.231 $5,545 $5,878 $6,230 $6,596 $82,347 $80,288 $78,105 $75,791 $73,338 $70,738 $67,982 $65,061 $61,965 $58,683 $55,204 $51,516 $47,607 $43,463 $39,071 $34,415 $29,480 $24,249 $18,704 $12,826 $6,596 $0 $617,653 $619,712 $621,895 $624,209 $626,662 $629,262 $632,018 $634,939 $638,035 $641,317 $644,796 $648,484 $652,393 $656.537 $660,929 $665,585 $670,520 $675,751 $681,296 $687,174 $693,404 $700,000