Question

Using Excel, determine the proceeds of the bond sale on 1/1/19.

PART A Sparty Corporation issued five-year, 8% bonds with a total face value of $500,000 on January 1, 2019. Interest is paid annually on December 31. The market rate of interest on this date was 6%. Sparty uses the effective interest rate method. Required: 1. Using Excel, determine the proceeds of the bond sale on 1/1/19. 2. Using the present value of a dollar table (found in Appendix E of your text), what factor would you use to calculate the present value of the face value of the bond? 3. Using the present value of an ordinary annuity table (found in Appendix E of your text), what factor would you use to calculate the present value of the coupon payments? For your own benefit, you may want to demonstrate that the price of the bonds is the same using the factors from the table that you got in Excel. 4. Did this bond sell at a premium or discount? 5. Using Excel, prepare a five-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L. Use formulas and reference cells in Excel to show how you calculate your numbers. 6. Prepare journal entries to record (1) the sale of the bonds on January 1, 2019, (2) the interest payment for the period ended December 31, 2019 and, (3) the final interest and face value payment at maturity on December 31, 2023. 7. Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2020.

Answer 1

Part A

Proceeds of bond sale on 1/1/19 = PV of interest + PV of redemption value

Amount of interest = $500000 * 8% = $40000

Year	Interest	Redemption value	Total cash flow	PVIF @ 6%	Present Value
1	40000		40000	0.94340	37735.85
2	40000		40000	0.89000	35599.86
3	40000		40000	0.83962	33584.77
4	40000		40000	0.79209	31683.75
5	40000	500000	540000	0.74726	403519.41
					542123.64

Proceeds of bond sale on 1/1/19 = $ 542,123.64

Part B

Proceeds of bond sale on 1/1/19 = PV of interest + PV of redemption value

Amount of interest = $1,250,000 * 7% * 6/12 = $43750

Market rate of interest = 10%

Effective half yearly market rate of interest = 10% * 6/12 = 5%

Half Year	Interest	Redemption value	Total cash flow	PVIF @ 5%	Present Value
1	43750		43750	0.95238	41666.67
2	43750		43750	0.90703	39682.54
3	43750		43750	0.86384	37792.89
4	43750		43750	0.82270	35993.23
5	43750		43750	0.78353	34279.27
6	43750		43750	0.74622	32646.92
7	43750		43750	0.71068	31092.31
8	43750		43750	0.67684	29611.72
9	43750		43750	0.64461	28201.64
10	43750		43750	0.61391	26858.70
11	43750		43750	0.58468	25579.72
12	43750	1250000	1293750	0.55684	720408.41
					1083814.03

Proceeds of bond sale on 1/1/19 = $ 1,083,814.03