Question

IDK, Inc. issues a $1,300,000 principal, 10% stated, 7% effective bond on January 2012. The bond matures on December 31, 2015. Coupon payments and discounting are annual. a. Calculate the proceeds from the bond. Is this bond discount, premium, or par? b. Calculate the interest expense for the year ended December 31, 2013. c. Calculate the net bond payable on December 31, 2014.

Answer 1

Correct Answer:

Requirement a:

Issue Price Of Bond

$ 1,432,101

Working:

Annually		Formula Applied
Face Value of Bond	$                      1,300,000
Interest Semi-Annually @ 10%	$                          130,000	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® (7%)	0.070	7%
Time Period (n) 4 years	4.00	4
Present Value of Face Value of Bond	$             991,763.77566	Face Value/(1+r%)^n
Present Value of Interest payment	$                    440,337.46	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                      1,432,101	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                          132,101	Issue Price - Face Value of Bonds

Requirement b:

Date	Interest Expense
31 December 2013	$           98,164

Working:

Effective Interest Amortization Table
Formula Used	(1,300,000*10%)	Last year’s Carrying value of bond* Market Rate of Interest (7%)	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 January 2019		-	-	$             1,432,101
31 December 2012	$ 130,000.0	$        100,247	$                    29,753	$             1,402,348
31 December 2013	$ 130,000.0	$           98,164	$                    31,836	$             1,370,513

Requirement c:

Date	Net bond payable
31 December 2014	$             1,336,449

Working:

Effective Interest Amortization Table
Formula Used	(1,300,000*10%)	Last year’s Carrying value of bond* Market Rate of Interest (7%)	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 January 2019		-	-	$             1,432,101
31 December 2012	$ 130,000.0	$        100,247	$                    29,753	$             1,402,348
31 December 2013	$ 130,000.0	$           98,164	$                    31,836	$             1,370,513
31 December 2014	$ 130,000.0	$           95,936	$                    34,064	$             1,336,449
31 December 2015	$ 130,000.0	$           93,551	$                    36,449	$             1,300,000

End of answer.

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