1.
The price of the bonds was issued on January 1, 2014 for $110,465,146.
1.
Explanation of Solution
Calculate the issue price of the bonds.
Working notes:
Calculate the present value of face value of principal
Particulars | Amount ($) |
Face value of bonds (a) | $100,000,000 |
PV factor at an annual market rate of 2.5% for 30 periods (b) |
|
Present value of face value of principal
| $47,674,268.52 |
Table (1)
Note: The present value of $1 for 30 periods at 2.5% is 0.47674 (refer Table 2 in Appendix).
Calculate present value of interest payments.
Particulars | Amount ($) |
Interest payments amount (a) | $3,000,000 |
PV factor at an annual market rate of 2.5% for 30 periods (b) |
|
Present value of interest payments
| $62,790,877.78 |
Table (2)
Note: The Present value of an ordinary annuity of $1 for 30 periods at 2.5% is 20.93029 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
2.
The carrying value of the bonds five years later on December 31, 2018.
2.
Explanation of Solution
Calculate the issue price of the bonds.
Working notes:
Calculate the present value of face value of principal
Particulars | Amount ($) |
Face value of bonds (a) | $100,000,000 |
PV factor at an annual market rate of 2.5% for 20 periods (b) |
|
Present value of face value of principal
| $61,027,094.29 |
Table (3)
Note: The present value of $1 for 20 periods at 2.5% is 0.61027 (refer Table 2 in Appendix).
Calculate present value of interest payments.
Particulars | Amount ($) |
Interest payments amount (a) | $3,000,000 |
PV factor at an annual market rate of 2.5% for 20 periods (b) |
|
Present value of interest payments
| $46,767,486.86 |
Table (4)
Note: The Present value of an ordinary annuity of $1 for 20 periods at 2.5% is 15.58916 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
3.
The market value of the bonds five years later on December 31, 2018, when market interest rate is 4.5%.
3.
Explanation of Solution
Calculate the issue price of the bonds.
Working notes:
Calculate the present value of face value of principal
Particulars | Amount ($) |
Face value of bonds (a) | $100,000,000 |
PV factor at an annual market rate of 4.5% for 20 periods (b) |
|
Present value of face value of principal
| $41,464,285.97 |
Table (5)
Note: The present value of $1 for 20 periods at 4.5% is 0.41464 (refer Table 2 in Appendix).
Calculate present value of interest payments.
Particulars | Amount ($) |
Interest payments amount (a) | $3,000,000 |
PV factor at an annual market rate of 4.5% for 20 periods (b) |
|
Present value of interest payments
| $39,023,809.35 |
Table (6)
Note: The Present value of an ordinary annuity of $1 for 20 periods at 4.5% is 13.00794 (refer Table 4 in Appendix).
Calculate the amount of interest payment.
4.
To Prepare: The
4.
Explanation of Solution
Redemption of Bonds
The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as redemption of bonds. It is otherwise called as retirement of bonds.
Prepare the journal entry to record early retirement of bonds as on 31st December 2018.
Date | Account titles and Explanation | Debit | Credit |
December 31, 2018 | Bonds payable | $100,000,000 | |
Premium on bonds payable (1) | $7,794,581.14 | ||
Gain on redemption of bonds (2) | $27,306,485.82 | ||
Cash | $80,488,095.32 | ||
(To record early retirement of bonds before the maturity period) |
Table (7)
Working notes:
Calculate premium on bonds payable.
Calculate gain on redemption of bonds.
Yes, this transaction surely, increase the net income $27,306,485.82.
5.
To Explain: Is DP plan is ethical or unethical, and Investors would agree with his plan.
5.
Explanation of Solution
Yes, DP plan is ethical, the early retirement of bonds as on 31st December 2018 of 6% bonds and company get a gain of $27,306,485.82 and he reissue of 9% bonds. According to the investor’s point of view, the gain amount of $27,306,485.82 needs to give a dividend. But DP plans to re-issue new bonds for 9%. Therefore, Investors would probably disagree with CFO plan.
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Chapter 9 Solutions
NWFSC FINANCIAL ACCOUNTING W/CONNECT+
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