Question

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.

b. semiannual interest payment and premium amortization on Jun. 30 of the 1st year.

c. semiannual interest payment and premium amortization on Dec. 31 of the 1st year.

C) Prepare an amortization table for the bonds for the five years.

Answer 1

A.
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
B.
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
Financial statement effect template on 30th June
Balance sheet									Income statement
Cash asset	+	Non-cash asset	=	Liabilities	+	Contributed capital	+	Earned capital	Revenue	-	Expenses	=	Net income
-$25,000.00				-$3,377.82				-$21,622.18			$21,622.18		-$21,622.18
				(25000-21622.18)							540554.48*4%
Company would coupon payment in cash and thus cash balance would decrease
Interest expense would increase expense and thus decrease net income and earned capital
Difference between coupon payment and interest expense is premium amortized.
Financial statement effect template on 31st December
Balance sheet									Income statement
Cash asset	+	Non-cash asset	=	Liabilities	+	Contributed capital	+	Earned capital	Revenue	-	Expenses	=	Net income
-$25,000.00				-$3,512.93				-$21,487.07			$21,487.07		-$21,487.07
				(25000-21487.07)							(540554.48-3377.82)*4%
Company would coupon payment in cash and thus cash balance would decrease
Interest expense would increase expense and thus decrease net income and earned capital.
Difference between coupon payment and interest expense is premium amortized.
C.
Amortization table for five years is shown below
Period	Coupon amount	Interest expense	Premium amortized	Carrying value
0				$540,554.48
1	$25,000	$21,622.18	$3,377.82	$537,176.66
2	$25,000	$21,487.07	$3,512.93	$533,663.72
3	$25,000	$21,346.55	$3,653.45	$530,010.27
4	$25,000	$21,200.41	$3,799.59	$526,210.68
5	$25,000	$21,048.43	$3,951.57	$522,259.11
6	$25,000	$20,890.36	$4,109.64	$518,149.48
7	$25,000	$20,725.98	$4,274.02	$513,875.46
8	$25,000	$20,555.02	$4,444.98	$509,430.47
9	$25,000	$20,377.22	$4,622.78	$504,807.69
10	$25,000	$20,192.31	$4,807.69	$500,000.00
Interest expense	Beginning carrying value of bond*4%
Premium amortized	Coupon amount - Interest expense
Carrying value	Beginning balance - Premium amortized