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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Preparing a Bond Amortization Table (Straight Line)

Cook Construction has agreed to construct a factor}' in a new industrial park. To finance the construction, the county government issued 86,500,000 of 10-year, 4.75% revenue bonds for $6,950,000 on January 1, 2020. Cook will pay the interest and principal on the bonds. When the bonds are repaid. Cook will receive title to the factory. In the interim. Cook will pay property taxes as if it owned the factory. This financing arrangement is attractive to Cook, as state and local government bonds are exempt from federal income taxation and thus carry a lower interest rate. The bonds are attractive to investors, as both Cook and the county are issuers. The bonds pay interest semiannually on June 30 and December 31.

Required:

  1. Prepare an amortization table through December 31, 2021, for these revenue bonds assuming straight-line amortization.
  2. CONCEPTUAL CONNECTION Discuss whether or not Cook should record the factory as an asset after it is constructed.
  3. CONCEPTUAL CONNECTION Discuss whether or not Cook should record the liability for these revenue bonds.

To determine

(a)

Introduction:

Under straight line amortization method, an equal amount of premium is amortized each period.

To prepare:

Amortization table.

Explanation

Given:

Company paid $6,500,000 for 10-year bonds of $6,950,000 at 4.75% on January 1, 2020 (interest payable semi-annually on June 30 and December 31).

Face Value = $6,500,000

Price of Bond = $6,950,000

Total Premium = Price of Bond - Face Value

Total Premium = $6,950,000 - $6,500,000

Total Premium = $450,000

No. of periods = 10×2 = 20

Premium Amortization = Total PremiumNo. of periods

Premium Amortization = $450,00020

To determine

(b)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To discuss:

If the constructed factory will be recorded as an asset in the company’s books.

To determine

(c)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To discuss:

If the bonds are to be recorded as a liability in the company’s books.

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