Question

1.Do the following problems in Excel. Submit your Excel spreadsheet so I can see how you solved the problems.

Gain or Loss on Bond redemption

On April 20, 2018, two years before maturity, Van Gogh Company retires £150,000 of its 5.6% semi-annual bonds payable at the price of 105. The bond book value April 20, 2018 is £155,000, reflecting an unamortized premium. Bond interest is fully paid and recorded up to the date of retirement.

1. What is the gain or loss on retirement of those bonds?
2. What was the market rate of the bond according to the book value? (What rate produces a PV of £155,000 on this £150,000, 5.6% semi-annual bonds with 2 years left?

2.

Warranty Liability and Expense

Pavo Real sells a sprinkler that carries a 1-year unconditional warranty against product failure. Pavo Real estimates that between the sale and the lapse of the product warranty, 3.2% of the total 250,000 units sold this period will require repair or replacement at a cost of £5.50 per unit. A warranty liability £5,000 is currently on the balance sheet. How much expense must Pavo Real report in its income statement if £1,000 is still needed to cover warranties in the past? What amount of additional warranty liability must it report on its balance sheet for the year?

Answer 1

1
a)	Book value of bond at the date of retirement	155,000.00
	Retiremenr value	157,500.00
	((150000/100*105)
	Loss on retirement	2,500.00
b)	Amount payable on maturity of bond	150000
	Interest payable semi annually(5.6%/2)	4200
	Current value of bond	155000
	Market rate that will make present value of future payments equal to current value
2	Future warranty liability	44,000.00
	(2,50,000*3.2%*5.5)
	Balance sheet	5,000.00
	Past warranty liability	1,000.00
	Warranty to be reported in income statement	40,000.00
	Additional Warranty to appear in Balance sheet	40,000.00