Company A
To: |
Glenda Weber, Accounting Director |
Shawn Grayson, Finance Director |
|
From: |
Robert Fleming, Treasury Director |
Date: |
January 5, Year 1 |
Subject: |
Purchase of Bonds from Company B |
Glenda/Shawn,
On January 1, Year 1, 50 bonds, each valued at $1,000, 8% stated rate, were purchased from Company B. These bonds are expected to mature on December 31, Year 3, paying interest annually on December 31st.
Bonds were purchased to yield 5%. Please classify these bonds as held-to-maturity securities.
Let me know if you have any questions.
-Robert Fleming
PRESENT VALUE OF $1 |
||||||||
RATE PER PERIOD |
||||||||
Period |
1.00% |
2.00% |
3.00% |
4.00% |
5.00% |
6.00% |
7.00% |
8.00% |
1 |
0.9901 |
0.9804 |
0.9709 |
0.9615 |
0.9524 |
0.9434 |
0.9346 |
0.9259 |
2 |
0.9803 |
0.9612 |
0.9426 |
0.9246 |
0.9070 |
0.8900 |
0.8734 |
0.8573 |
3 |
0.9706 |
0.9423 |
0.9151 |
0.8890 |
0.8638 |
0.8396 |
0.8163 |
0.7938 |
4 |
0.9610 |
0.9239 |
0.8885 |
0.8548 |
0.8227 |
0.7921 |
0.7629 |
0.7350 |
5 |
0.9515 |
0.9057 |
0.8626 |
0.8219 |
0.7835 |
0.7473 |
0.7130 |
0.6806 |
6 |
0.9421 |
0.8880 |
0.8375 |
0.7903 |
0.7462 |
0.7050 |
0.6663 |
0.6302 |
7 |
0.9327 |
0.8706 |
0.8131 |
0.7599 |
0.7107 |
0.6651 |
0.6228 |
0.5835 |
8 |
0.9235 |
0.8535 |
0.7894 |
0.7307 |
0.6768 |
0.6274 |
0.5820 |
0.5403 |
9 |
0.9143 |
0.8368 |
0.7664 |
0.7026 |
0.6446 |
0.5919 |
0.5439 |
0.5003 |
10 |
0.9053 |
0.8204 |
0.7441 |
0.6756 |
0.6139 |
0.5584 |
0.5084 |
0.4632 |
PRESENT VALUE OF AN ORDINARY ANNUITY OF $1 |
||||||||
RATE PER PERIOD |
||||||||
Period |
1.00% |
2.00% |
3.00% |
4.00% |
5.00% |
6.00% |
7.00% |
8.00% |
1 |
.9901 |
.9804 |
.9709 |
.9615 |
.9524 |
.9434 |
.9346 |
.9259 |
2 |
1.9704 |
1.9416 |
1.9135 |
1.8861 |
1.8594 |
1.8334 |
1.8080 |
1.7833 |
3 |
2.9410 |
2.8839 |
2.8286 |
2.7751 |
2.7232 |
2.6730 |
2.6243 |
2.5771 |
4 |
3.9020 |
3.8077 |
3.7171 |
3.6299 |
3.5460 |
3.4651 |
3.3872 |
3.3121 |
5 |
4.8534 |
4.7135 |
4.5797 |
4.4518 |
4.3295 |
4.2124 |
4.1002 |
3.9927 |
6 |
5.7955 |
5.6014 |
5.4172 |
5.2421 |
5.0757 |
4.9173 |
4.7665 |
4.6229 |
7 |
6.7282 |
6.4720 |
6.2303 |
6.0021 |
5.7864 |
5.5824 |
5.3893 |
5.2064 |
8 |
7.6517 |
7.3255 |
7.0197 |
6.7327 |
6.4632 |
6.2098 |
5.9713 |
5.7466 |
9 |
8.5660 |
8.1622 |
7.7861 |
7.4353 |
7.1078 |
6.8017 |
6.5152 |
6.2469 |
10 |
9.4713 |
8.9826 |
8.5302 |
8.1109 |
7.7217 |
7.3601 |
7.0236 |
6.7101 |
Scroll down to complete all parts of this task.
Using the information provided in the exhibits, enter the appropriate amounts in the designated cells below. Enter all amounts as positive values. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).
Items |
Amount |
The amount Company A paid for the bonds. |
|
The amount of premium on the bonds on January 1, Year 1. |
|
The amount of cash interest received by Company A during Year 1. |
|
The amount of interest revenue recognized in the Year 1 income statement. |
|
The amount of bond premium amortized in Year 1. |
|
The carrying amount of the bonds presented in the December 31, Year 1, financial statements. |
ANSWER:
Required 1) The amount Company A paid for the bonds.
n = 3, i = 5%
Cash Flow | Table Value | Amount | Present Value |
Par (Maturity) Value | 0.8638 | 50,000 (50 * 1,000) | 43,190 |
Interest (Annuity) | 2.7232 | 4,000 (50,000 * 8%) | 10,893 |
Price of bonds | 54,083 |
Required 2) The amount of premium on the bonds on January 1, Year 1.
Amount of premium on the bonds on January 1, Year 1. = $54,083 - $50,000 = $4,083
Required 3) The amount of cash interest received by Company A during Year 1.
Amount of cash interest received by Company A during Year 1 = $4,000
Required 4) The amount of interest revenue recognized in the Year 1 income statement.
Amount of interest revenue recognized in the Year 1 income statement. = $54,083 * 5% = $2,704
Required 5) The amount of bond premium amortized in Year 1.
Amount of bond premium amortized in Year 1 = $4,000 - $2,704 = $1,296
Required 6) The carrying amount of the bonds presented in the December 31, Year 1, financial statements.
Carrying amount of the bonds presented in the December 31, Year 1, financial statements
= $54,083 - $1,296 = $52,787
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