Question

Problem Two:

On January 1, 2017, Ashlock Chemical AG issued €4,000,000, 10%, 10-year bonds at €4,543,627. This price resulted in an 8% effective-interest rate on the bonds. Ashlock uses the effective-interest method to amortize bond premium or discount. The bonds pay interest semi-annually on January 1 and July 1. Rounding to two decimal places, answer the following:

a) Use Present Value of 1 Table and Present Value of an Annuity of 1 Table, and your knowledge of time value of money, to prove why the bonds were issued at $4,543,626. Then prepare the JE for the issuance on January 1, 2017. If your calculations differ due to rounding, use the $4,543,626 figure for the issuance JE and the subsequent requirements. (Special side note: if interest were paid annually, the textbook figure of $4,543,626 would be incorrect. Assuming annual interest payments, the PV would be $4,536,792! (You may want to prove this on your own.)

b) Assuming the bonds are redeemed at maturity, what is the total amount of interest expense to be recognized over the life of the bonds? Show your work.

c) Assume the company has an annual accounting period ending the end of February.

1. Prepare the AJE required on February 28, 2017.

2. Prepare the journal entry to record the payment of interest on July 1, 2017

d) Ignore (c). Assume the annual accounting period ends on December 31 instead.

1.Prepare the journal entry to record the payment of interest on July 1, 2017.

2. Prepare the AJE required on December 31, 2017

3.Prepare the journal entry to record the payment of interest on January 1, 2018.

4. What is the carrying value of the bonds on January 1, 2018? Show your calculations

e) Assume that after interest is paid on January 1, 2018, the company buys back the bonds. On that date, the market interest rate was 12%.

1.Calculate what the company must pay to redeem the bonds. (Hint: This requires time value of money calculations.)

2.Prepare the journal entry to record the redemption.

3.Using a residual analysis, explain why a gain/loss must be recognized; also explain where on the SOCI the gain/loss would appear.

4.Assume a gain was realised. Assess the immediate impact on the debt/asset ratio. What will be the impact on the interest cover ratio for the financial year ending December 31, 2018 (compared with the previous financial year)?

Answer 1

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	Hi answred first four parts, please post remaining question separately. aas per HomeworkLib policy, allowed to answer four part only
	Part a:
		PVf/Pvaf	Amount	PV
	Present Value of 4000000 (n 20, i 4%)	0.456387	$       4,000,000	$                      1,825,548
	Present Value of Interest 4000000*5%	13.5903	$           200,000	$                      2,718,060
	Bond Issure Price			$                      4,543,608
				Round off gap
	Part b:
	Total Interst to be recognized	$        4,000,000
	(4000000*5%*20 Years)
	Part c:
Feb 28 2017	Interest Expense	$              33,333		200000*2/12
Feb 28 2017	Premium on Bond Payable		$                3,043	18255*2/12
Feb 28 2017	Interest Payable		$             30,290
Jul 1 2017	Interest Payable	$              30,290
Jul 1 2017	Interest Expense	$           166,667
Jul 1 2017	Premium on Bond Payable		$             15,212
Jul 1 2017	Cash		$           181,745
	Part d:
Jul 1 2017	Interest Expense	$           200,000
Jul 1 2017	Premium on Bond Payable		$             18,255
Jul 1 2017	Cash		$           181,745
	(to record interest and amortiazation)
Dec 31 2017	Interest Expense	$           200,000
Dec 31 2017	Premium on Bond Payable		$             18,985
Dec 31 2017	Interest Payable		$           181,015
	(to record interest and amortiazation)
Jan 1 2018	Interest Payable	$           181,015
Jan 1 2018	Cash		$           181,015
	Carrying Value:
	Bond	$        4,000,000
	Add: Premium On Bond	$           506,387	$       4,506,387

	E*5%	4000000*4%	A-B	Prior Bal-C	E+D
Period	A	B	C	D	E
0				$      543,627	$   4,543,627
1	$ 181,745.08	$     200,000	$     18,255	$      525,372	$   4,525,372
2	$ 181,014.88	$     200,000	$     18,985	$      506,387	$   4,506,387
3	$ 180,255.48	$     200,000	$     19,745	$      486,642	$   4,486,642
4	$ 179,465.70	$     200,000	$     20,534	$      466,108	$   4,466,108
5	$ 178,644.33	$     200,000	$     21,356	$      444,752	$   4,444,752
6	$ 177,790.10	$     200,000	$     22,210	$      422,543	$   4,422,543
7	$ 176,901.70	$     200,000	$     23,098	$      399,444	$   4,399,444
8	$ 175,977.77	$     200,000	$     24,022	$      375,422	$   4,375,422
9	$ 175,016.88	$     200,000	$     24,983	$      350,439	$   4,350,439
10	$ 174,017.56	$     200,000	$     25,982	$      324,456	$   4,324,456
11	$ 172,978.26	$     200,000	$     27,022	$      297,435	$   4,297,435
12	$ 171,897.39	$     200,000	$     28,103	$      269,332	$   4,269,332
13	$ 170,773.28	$     200,000	$     29,227	$      240,105	$   4,240,105
14	$ 169,604.22	$     200,000	$     30,396	$      209,710	$   4,209,710
15	$ 168,388.38	$     200,000	$     31,612	$      178,098	$   4,178,098
16	$ 167,123.92	$     200,000	$     32,876	$      145,222	$   4,145,222
17	$ 165,808.88	$     200,000	$     34,191	$      111,031	$   4,111,031
18	$ 164,441.23	$     200,000	$     35,559	$         75,472	$   4,075,472
19	$ 163,018.88	$     200,000	$     36,981	$         38,491	$   4,038,491
20	$ 161,539.64	$     200,000	$     38,491	$                  -0	$   4,000,000
Total		$ 4,000,000