Analyzing and Reporting Financial Statement Effects of Bond Transactions Assume that on January 1, Xfinity issues $500,000 of 5-year, 8% coupon bonds payable, yielding an effective annual interest rate of 10%. Interest is payable semiannually on June 30 and December 31.
D) Compute the issue price.
E) Complete Comcast’s financial statement effects template for
a. bond issuance.
b. semiannual interest payment and premium amortization on Jun. 30 of the 1st year.
c. semiannual interest payment and premium amortization on Dec. 31 of the 1st year.
F) Prepare an amortization table for the bonds for the five years.
A. | |||||||||||||
Price of bond is calculated as present value of coupon payment plus present value of par value of bond | |||||||||||||
Price of bond | Coupon amount*(1-(1+r^-n))/r + Face value*(1/(1+r^n) | ||||||||||||
where r is interest rate and n is number of years | |||||||||||||
Semi-annual coupon amount | $20,000 | 500000*(8%/2) | |||||||||||
Semi-annual yield | 5.00% | (10%/2) | |||||||||||
No of payments | 10 | 5*2 | |||||||||||
Calculation of price of bond is shown below | |||||||||||||
Price of bond | 20000*(1-(1.05^-10)/0.05)+500000*(1/1.05^10) | ||||||||||||
Price of bond | 20000*7.721735 + 500000*0.613913 | ||||||||||||
Price of bond | $461,391.33 | ||||||||||||
B. | |||||||||||||
Issue of bond would increase in cash and liability of company, financial statement impact is shown below | |||||||||||||
Balance sheet | Income statement | ||||||||||||
Cash asset | + | Non-cash asset | = | Liabilities | + | Contributed capital | + | Earned capital | Revenue | - | Expenses | = | Net income |
$461,391.33 | $500,000.00 | ||||||||||||
-$38,608.67 | |||||||||||||
Bond is issued at price lower than its par value and thus is issued at discount. Discount on bond is shown separately | |||||||||||||
Financial statement effect template on 30th June | |||||||||||||
Balance sheet | Income statement | ||||||||||||
Cash asset | + | Non-cash asset | = | Liabilities | + | Contributed capital | + | Earned capital | Revenue | - | Expenses | = | Net income |
-$20,000.00 | $3,069.57 | -$23,069.57 | $23,069.57 | -$23,069.57 | |||||||||
(23069.57-20000) | 461391.33*5% | ||||||||||||
Company would coupon payment in cash and thus cash balance would decrease | |||||||||||||
Interest expense would increase expense and thus decrease net income and earned capital | |||||||||||||
Difference between coupon payment and interest expense is discount amortized. | |||||||||||||
Financial statement effect template on 31st December | |||||||||||||
Balance sheet | Income statement | ||||||||||||
Cash asset | + | Non-cash asset | = | Liabilities | + | Contributed capital | + | Earned capital | Revenue | - | Expenses | = | Net income |
-$20,000.00 | $3,223.04 | -$23,223.04 | $23,223.04 | -$23,223.04 | |||||||||
(23223.04-20000) | (461391.33+3069.57)*5% | ||||||||||||
Company would coupon payment in cash and thus cash balance would decrease | |||||||||||||
Interest expense would increase expense and thus decrease net income and earned capital. | |||||||||||||
Difference between coupon payment and interest expense is discount amortized. | |||||||||||||
C. | |||||||||||||
Amortization table for five years is shown below | |||||||||||||
Period | Coupon amount | Interest expense | Discount amortized | Carrying value | |||||||||
0 | $461,391.33 | ||||||||||||
1 | $20,000 | $23,069.57 | $3,069.57 | $464,460.89 | |||||||||
2 | $20,000 | $23,223.04 | $3,223.04 | $467,683.94 | |||||||||
3 | $20,000 | $23,384.20 | $3,384.20 | $471,068.13 | |||||||||
4 | $20,000 | $23,553.41 | $3,553.41 | $474,621.54 | |||||||||
5 | $20,000 | $23,731.08 | $3,731.08 | $478,352.62 | |||||||||
6 | $20,000 | $23,917.63 | $3,917.63 | $482,270.25 | |||||||||
7 | $20,000 | $24,113.51 | $4,113.51 | $486,383.76 | |||||||||
8 | $20,000 | $24,319.19 | $4,319.19 | $490,702.95 | |||||||||
9 | $20,000 | $24,535.15 | $4,535.15 | $495,238.10 | |||||||||
10 | $20,000 | $24,761.90 | $4,761.90 | $500,000.00 | |||||||||
Interest expense | Beginning carrying value of bond*4% | ||||||||||||
Discount amortized | Interest expense - Coupon amount | ||||||||||||
Carrying value | Beginning balance + Discount amortized |
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