Question

On January 1, 2018, White, Inc. issues $1,000,000 total face value, 10-yr bonds with an annual stated interest rate of 5%. Interest is paid semi-annually on June 30^th and December 31st. The company received $559,260 upon issuance. (Solutions posted online)

Period	Cash Paid	Interest Expense	Amortization of Discount/Premium	Unamortized Premium/Discount	Bonds Carrying Value (Book Value)
Issuance	Don’t use	Don’t use	Don’t use
6/30/2018
12/31/2018
6/30/2019

Are the bonds issued at a premium, a discount, or at face value?

What is the (annual) market interest rate at the time of issue?

How much cash is paid to the bondholder on December 31, 2018?

How much Interest Expense would be recorded for 2018?

What would be the Carrying Value of the bonds at June 30, 2019?

On December 31, 2020, when the annual market rate of interest was 6%, White repurchased 10% of these bonds on the open market and retired the debt. What Gain or Loss would White record at that time?

Answer 1

The bond issue price is lower than their face value, hence they are issued at discount Amount PV Discounted factor at Present value 6.50% 0.2838 $283,797 11.0185 $275,463 $559,260 Principal $1,000,000 Interest at 5% 2.5% for 6 months) $25,000 Issue Price of Bond Since Market interest rate is 13%-semi annual will be 6.5%. Present value factor is taken for 6.5% for 20 years Interest is for 10 years and semi-annual basis hence total number of years will be 10 years The market interest rate is 13%. Amortisation Schedule Semi-annual Interest Dates Cash Paid Interest Expense Amortisation Unamortised of Discount/ Premium/ Premium Discount Issuance 6/30/2018 12/31/2018 6/30/2019 12/31/2019 6/30/2020 12/31/2020 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $36,352 $37,090 $37,876 $38,713 $39,604 $40,553 $11,352 $12,090 $12,876 $13,713 $14,604 $15,553 $440,740 $429,388 $417,299 $404,423 $390,711 $376,107 $360,554 Bond Carrying Value (Book Value) $559,260 $570,612 $582,701 $595,577 $609,289 $623,893 $639,446 Interest expense at the rate of 13% per annum (6.5% for 6 months) is calculated on Bond carrying amount Therefore, cash paid to bondholder on December 31, 2018 is $25,000.

Interest expense for 2018 is $73,442 that is ($36,352+$37,090). The carrying value of bond on June 2019 is $595,577. Bond issue and Amortisation table reworked Amount Principal $1,000,000 Interest at 5% 2.5% for 6 months) $25,000 Issue Price of Bond PV Discounted factor at 3% Present value 0.5537 $553,676 14.8775 $371,937 $925,613 Amortisation Schedule at 6% market rate Semi-annual Interest Dates Cash Paid Interest Expense Amortisation Unamortised of Discount Premium/ Premium Discount Issuance 6/30/2018 12/31/2018 6/30/2019 12/31/2019 6/30/2020 12/31/2020 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $27,768 $27,851 $27,937 $28,025 $28,116 $2,768 $2,851 $2,937 $3,025 $3,116 $3,209 $74,387 $71,619 $68,768 $65,831 $62,806 $59,690 $56,480 Bond Carrying Value (Book Value) $925,613 $928,381 $931,232 $934,169 $937,194 $940,310 $943,520 $28,209 Carrying Value of Bond- 13% Market rate Carrying Value of Bond-6% Market rate Total Loss Loss at 10% $639,446.31 $943,519.63 -$304,073.33 $30,407.33 Slight rounding off difference compared to your answer