PART 2 Problems 6u points). Problem 1 (25 points). Sofia Corporation issued 5,00

Question

PART 2 Problems 6u points). Problem 1 (25 points). Sofia Corporation issued 5,000 of its 10%, s l ,000 par value bonds when the market rate is 8.5% for similar bonds. The bonds are dated January 1, 20X0 and will mature in twelve years. Interest is payable semiannually on January 1 and July 1 of each year. The company uses the effective interest method to amortize any premium or discount on bonds. The company's fiscal year is the calendar year REQUIRED: (1) Compute the price of the bonds on January 1, 20X0. Round all calculations to the nearest whole dollar Using the attached forms, prepare an amortization schedule for these bonds through the January 1, 20X2 interest payment. Round all calculations to the nearest whole dollar. Using the attached forms, prepare all general journal entries, in proper form, that should be made during calendar years 20X0 and 20X1 for these bonds. Show supporting calculations and round all answers to the nearest whole dollar. Provide a brief explanation for each entry (2) (3)

Explanation / Answer

(1) bond price = 5,557,402.74

(2)

Amortization schedule:

(3)

Entries:

Particulars Cash flow Discount factor Discounted cash flow Interest payments-Annuity (4.25%,24 periods) 250,000.0 14.8641 3,716,018.27 Principle payments -Present value (4.25%,24 periods) 5,000,000 0.3683 1,841,384.47 A Bond price         5,557,402.74 Face value         5,000,000.00 Premium/(Discount)            557,402.74 Interest amount: Face value 5,000,000 Coupon/stated Rate of interest 10.00% Frequency of payment(once in) 6 months B Interest amount 5000000*0.1*6/12= 250000 Present value calculation: yield to maturity/Effective rate 8.50% Effective interest per period(i) 0.085*6/12= 4.250% Number of periods: Ref Particulars Amount a Number of interest payments in a year                                     2 b Years to maturiy                                12.0 c=a*b Number of periods                                   24

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