ABC Corp. issued $8,000,000 of 8% debentures on January 1, 2018. The bonds pay interest semiannually...
ABC Corp. issued $8,000,000 of 8% debentures on January 1, 2018. The bonds pay interest semiannually on July 1 and January 1. The maturity date on these bonds is January 1, 2026. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 10%.
Required: Compute the present value of the bonds and the amortization table. During the test, I will provide additional instructions.
Homework Answers
Correct Answer:
The Present value of bond is equal to $ 7,132,978
Working:
|
Formula Applied |
||
|
Face Value of Bond |
$ 80,00,000 |
|
|
Interest semi-annually @ 10% |
$ 320,000 |
(8,000,000 * 8% )/2 |
|
Effective interest Rate (r) |
$ 0.05 |
10% / 2 |
|
Time Period (n) |
16 |
8*2 |
|
Present Value of Face Value of Bond |
$ 3,664,892 |
8,000,000/ (1+r%)^n |
|
Present Value of Interest payment |
$ 3,468,086 |
21000*((1-(1+r)^-n)/r) |
|
Issue Price Of Bond (present value of Bond) |
$ 7,132,978 |
PV of Face value of bond + PV of Interest Paid Annually |
|
Bonds Issued at a Discount |
$ 867,022 |
Issue Price - Face Value of Bonds |
Amortization Table:
|
Effective Interest Amortization Table |
||||
|
Formula Used |
(8,000,000*.08)/2 |
Last year’s Carrying value of bond* Market Rate of Interest |
Interest Expense - Cash Paid |
Last year's Carrying value of Bond - current year's Premium amortized |
|
Date |
cash paid |
Interest Expense |
Discount Amortized |
Carrying value of Bond |
|
01-01-2018 |
- |
- |
7132978.44 |
|
|
01-07l-2018 |
$ 3,20,000 |
$ 3,56,649 |
36,648.92 |
7169627.36 |
|
01-01-2019 |
$ 3,20,000 |
$ 3,58,481 |
38,481.37 |
7208108.72 |
|
01-07-2019 |
$ 3,20,000 |
$ 3,60,405 |
40,405.44 |
7248514.16 |
|
01-01-2020 |
$ 3,20,000 |
$ 3,62,426 |
42,425.71 |
7290939.87 |
|
01-07-2020 |
$ 3,20,000 |
$ 3,64,547 |
44,546.99 |
7335486.86 |
|
01-01-2021 |
$ 3,20,000 |
$ 3,66,774 |
46,774.34 |
7382261.21 |
|
01-07-2021 |
$ 3,20,000 |
$ 3,69,113 |
49,113.06 |
7431374.27 |
|
01-01-2022 |
$ 3,20,000 |
$ 3,71,569 |
51,568.71 |
7482942.98 |
|
01-07-2022 |
$ 3,20,000 |
$ 3,74,147 |
54,147.15 |
7537090.13 |
|
01-01-2023 |
$ 3,20,000 |
$ 3,76,855 |
56,854.51 |
7593944.63 |
|
01-07l-2023 |
$ 3,20,000 |
$ 3,79,697 |
59,697.23 |
7653641.87 |
|
01-01-2024 |
$ 3,20,000 |
$ 3,82,682 |
62,682.09 |
7716323.96 |
|
01-07-2024 |
$ 3,20,000 |
$ 3,85,816 |
65,816.20 |
7782140.16 |
|
01-01-2025 |
$ 3,20,000 |
$ 3,89,107 |
69,107.01 |
7851247.17 |
|
01-07-2025 |
$ 3,20,000 |
$ 3,92,562 |
72,562.36 |
7923809.52 |
|
01-01-2026 |
$ 3,20,000 |
$ 3,96,190 |
76,190.48 |
8000000.00 |
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