On 1st July 2002, Midget Ltd. acquired some corporate bonds issued by Farrelly Ltd. These bonds cast $ 2,277,220 and had a life of four years. They had a 'face value' of $ 2 million and offered a coupon rate of 10 per cent paid annually ($ 200,000 per year, paid on 30th June) The bonds would repay the principal of $ 2 million on 30th June 2026. At the time, the market required a rate of return on 6 per cent on such bonds. Midget Ltd. operates within a business model where government bonds are held in order to collect contractual cash flows and there is no intention to trade them. Assume there were no direct costs associated with acquiring the bonds. Needs answers to the following; a) Explain why the company was prepared to pay $ 2,277,220 for the bonds given that, apart from the interest, they expect to receive only $ 2 million back in four years c) Calculate the amortised cost of the bonds as at 30th June 2023, 2024, 2025 and 2026. d) Provide the accounting journal entries for the years ending 30th June 2023, 2024, 2025 and 2026. Relevant PV values are as follows; PV Factor for an annuity for 4 years = 3.4651 PV Factor for an amount to be received in 4 years time = 0.7921
On 1st July 2002, Midget Ltd. acquired some corporate bonds issued by Farrelly Ltd. These bonds cast $ 2,277,220 and had a life of four years. They had a 'face value' of $ 2 million and offered a coupon rate of 10 per cent paid annually ($ 200,000 per year, paid on 30th June) The bonds would repay the principal of $ 2 million on 30th June 2026. At the time, the market required a rate of return on 6 per cent on such bonds. Midget Ltd. operates within a business model where government bonds are held in order to collect contractual cash flows and there is no intention to trade them. Assume there were no direct costs associated with acquiring the bonds. Needs answers to the following; a) Explain why the company was prepared to pay $ 2,277,220 for the bonds given that, apart from the interest, they expect to receive only $ 2 million back in four years c) Calculate the amortised cost of the bonds as at 30th June 2023, 2024, 2025 and 2026. d) Provide the accounting journal entries for the years ending 30th June 2023, 2024, 2025 and 2026. Relevant PV values are as follows; PV Factor for an annuity for 4 years = 3.4651 PV Factor for an amount to be received in 4 years time = 0.7921
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 17P
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On 1st July 2002, Midget Ltd. acquired some corporate bonds issued by Farrelly Ltd. These bonds cast $ 2,277,220 and had a life of four years. They had a 'face value' of $ 2 million and offered a coupon rate of 10 per cent paid annually ($ 200,000 per year, paid on 30th June) The bonds would repay the principal of $ 2 million on 30th June 2026. At the time, the market required a
Assume there were no direct costs associated with acquiring the bonds.
Needs answers to the following;
- a) Explain why the company was prepared to pay $ 2,277,220 for the bonds given that, apart from the interest, they expect to receive only $ 2 million back in four years
- c) Calculate the amortised cost of the bonds as at 30th June 2023, 2024, 2025 and 2026.
- d) Provide the accounting
journal entries for the years ending 30th June 2023, 2024, 2025 and 2026.
Relevant PV values are as follows;
PV Factor for an annuity for 4 years = 3.4651
PV Factor for an amount to be received in 4 years time = 0.7921
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