Question

Refer to the bond details in Problem 14-4B Required 1. Compute the total bond interest expense over the bonds' life. 2. Prepare an effective interest amortization table like the one in Exhibit 14B.2 for the bonds life. 3. Prepare the journal entries to record the first two interest payments. 4. Use the market rate at issuance to compute the present value of the remaining cash flows for these chch0 Problem 14-9B Effective Interest: Amortization of bond premium; computing bond price P1 P6 Check (2) 6/30/2019 caryýing volue, $327.136 bonds as of December 31, 2019. Compare your answer with the amount shown on the amortizationy table as the balance for that date (from part 2) and explain your findings. 4) $325,807

Answer 1

1. Par value of the bond is 320,000.

Coupon are paid semiannually at a coupon rate of 9%.

Hence, Ripkin will make 10 coupon payments of 9% * 320,000/2 = 14400

Hence, total bond interest to be paid = 14400 * 10 = 144000

Now, the bond is issued at 332,988.00, while Ripkin will have to Pay 320000 at the time of maturity.

Hence, total interest expense paid during the life of bond = 144000 + 320000 - 332988 = 131012

Hence, Ripkin will pay 131012 as interest for bonds over bond's life.

2. In effective interest amortisation, bond premium amortisation is described by the following formula;

Bond premium amortisation = P * r_m - F * r_c

Where, P is bond's market price (It is basically the carrying value of the bond at any particular given time), r_m is the market rate, F is the face value and r_c is the coupon rate of the bond.

Hence, for the given bond we have;

Time	Cash interest	Interest	Amortization	Unamortized Bond premium	Carrying value
1-Jan-17		-	-	12,988.00	332,988.00
30-Jun-17	14,400.00	13,319.52	1,080.48	11,907.52	331,907.52
31-Dec-17	14,400.00	13,276.30	1,123.70	10,783.82	330,783.82
30-Jun-18	14,400.00	13,231.35	1,168.65	9,615.17	329,615.17
31-Dec-18	14,400.00	13,184.61	1,215.39	8,399.78	328,399.78
30-Jun-19	14,400.00	13,135.99	1,264.01	7,135.77	327,135.77
31-Dec-19	14,400.00	13,085.43	1,314.57	5,821.20	325,821.20
30-Jun-20	14,400.00	13,032.85	1,367.15	4,454.05	324,454.05
31-Dec-20	14,400.00	12,978.16	1,421.84	3,032.21	323,032.21
30-Jun-21	14,400.00	12,921.29	1,478.71	1,553.50	321,553.50
31-Dec-21	14,400.00	12,862.14	1,537.86	15.64	320,015.64

3. General entries;

First interest payment

Account	Dr	Cr
Interest Expense	13,319.52
Bond Premium	1,080.48
Cash		14,400.00

Second interest payment

Account	Dr	Cr
Interest Expense	13,276.30
Bond Premium	1,123.70
Cash		14,400.00

4.

The cashflow is;

Date	Cashflow
31-Dec-19	14,400.00
30-Jun-20	14,400.00
31-Dec-20	14,400.00
30-Jun-21	14,400.00
31-Dec-21	334,400.00

Now, finding NPV of the cashflow, we get;

$NPV=\frac{14400}{1.04}+\frac{14400}{1.04^{2}}+\frac{14400}{1.04^{3}}+\frac{14400}{1.04^{4}}+\frac{334400}{1.04^{5}}=327122.92$

Which is almost equal to the carrying value of the bond just before the payment of 31-Dec-19 coupon, i.e. on 30-Jun-2019.