Question

Additional Assignment :Use the following information to answer questions 9-11.

On January 1, 2018 Ball Corp issued $20,000,000 of 3% bonds due in 20 years with interest payable semiannually on June 30 and December 31 each year. The market rate is 4%. The bonds issue at $17,264,444.

9) Which of the following is true about the issue price and the face price?

A) The difference in the bond issue price and the bond face value represents additional interest revenue for Ball Corp.

B) The bonds are issuing at a premium because the market rate is higher than the stated rate.

C) The bonds are issued at a discount and Ball Corp must repay $20,000,000 at maturity.

D) The bond liability is put on the books at the face value of $20,000,000 on January 1, 2018.

E) Ball Corp will receive $20,000,000 on Jan 1, 2018 and they will pay back $17,264,444 at maturity.

10) If Ball Corp decided to retire the bond early and did this on 12/31/2018 for a repurchase price of $17,000,000, what is the impact to the financial statements

A) Ball Corp would recognize a loss on their balance sheet.

B) The Bond Liability would remain on the balance sheet until maturity.

C) Ball Corp would recognize a gain on their balance sheet.

D) Ball Corp would recognize a loss on their income statement.

E) Ball Corp would have a higher net income as a result of this repurchase.

11) What is the total interest expense that Ball Corp will recognize related to this bond in 2018? Round all numbers to the nearest $1.

A) $600,000

B) $300,000

C) $345,289

D) $691,484

E) $45,289

Answer 1

Answer 9,

C) The bonds are issued at a discount and Ball Corp must repay $20,000,000 at maturity.

• Since Bond is having face value of $20,000,000 and it is issued at less price which is $17,264,444.. Company has to pay face value of Bond at maturity.

Answer 10.

E) Ball Corp would have a higher net income as a result of this repurchase.

• If any company decides to retire the bonds before its maturity, Gain or Loss on retirement of Bonds need to be recognized in income statement.
• Gain or loss is difference between Carrying value of Bonds and Price Paid to repurchase the Bonds.
• Since Carrying value of Bonds Payable is $17,355,928 ( see calculation below ) and Company has paid only 17,000,000 to retire the bonds, Hence there will be gain of $355,928 which will increase company's net income.

Semiannual Discount End of Semi annual Interest Paid (amortization ( Book Value( Column B+ End of Period Net ng of period |net book value of |Interest Expense |$20,000,000"3%/2|Column C- ( Column B * 4%/21) Period 1 Ending Bonds Column D ColumnE S345,289 $300,000$45,288.88 $17,309,732.88 $300,000 $46,19466$17,35,927.54 2 6/30/2018$17.264,444 3 12/31/2018 $17,309,733 $346,195

Answer 11

(D) $691,484

Semi annual End of Period Net Discount Beginning of period Semi annual Interest Paid amortization Book Value ( net book value of Interest Expense | $20,000,000*3%/21 Column C Column B *490/2 Period Column B+ 1 Endin Bonds Column D Column E 2 6/30/2018 3 12/31/2018 $345,289 $300,000 $17,309,733 $17,264,444 $45,289 $346,195 $300,000 $17,355,928 $17,309,733 $46,195 4. Interest Expense For $691,484 2018 ( Cell C2 + C3)

Formulas:-

Semi annual Discount Beginning of period Interest Semi annual amortization (End of Period Net Book net book value of Expense ( Interest PaidColumnC Value (Column B+ $20,000,000*3%/2) | Column D) | Column E 1 Period Ending Bonds Column B * 92*496/2 2 June 2018 17264444 300000 -C2-D2 B2+E2 B3*4%/2 17309732.88 3 Dec 2018 300000 C3-D3 B3+E3 4 Interest Expense For 2018 ( Cell C2 C3)C2+C3