1)On March 1, 2014, Catalin Corporation issued $40 million in bonds that mature
ID: 2457347 • Letter: 1
Question
1)On March 1, 2014, Catalin Corporation issued $40 million in bonds that mature in 10 years. The bonds have a stated interest rate of 5.8 percent and pay interest on March 1 and September 1. When the bonds were sold, the market rate of interest was 6 percent. Catalin uses the effective interest method. By December 31, 2014, the market interest rate had increased to 6.5 percent
2)Record the issuance of the bond on March 1, 2014. (Enter your answers in dollars and not in millions. If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round time value factor to 4 decimal places.)
3)Compute the present value of the difference between the interest paid each six months over the life of the bond and the interest demanded by the market. Use the market rate of interest and the 10-year life of the bond in your present value computation. (Enter your answers in dollars and not in millions. Round time value factor to 4 decimal places.)
4)Record the payment of interest on September 1, 2014. (Enter your answers in dollars and not in millions. Round your answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
5)Record the adjusting entry for accrued interest on December 31, 2014. (Enter your answers in dollars and not in millions. Round your answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
6)Compute the present value of Catalin’s bonds, assuming that they had a 7-year life instead of a 10-year life. (Enter your answers in dollars and not in millions. Round your answer to the nearest dollar amount. Round time value factor to 4 decimal places.)
1)On March 1, 2014, Catalin Corporation issued $40 million in bonds that mature in 10 years. The bonds have a stated interest rate of 5.8 percent and pay interest on March 1 and September 1. When the bonds were sold, the market rate of interest was 6 percent. Catalin uses the effective interest method. By December 31, 2014, the market interest rate had increased to 6.5 percent
2)Record the issuance of the bond on March 1, 2014. (Enter your answers in dollars and not in millions. If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round time value factor to 4 decimal places.)
3)Compute the present value of the difference between the interest paid each six months over the life of the bond and the interest demanded by the market. Use the market rate of interest and the 10-year life of the bond in your present value computation. (Enter your answers in dollars and not in millions. Round time value factor to 4 decimal places.)
4)Record the payment of interest on September 1, 2014. (Enter your answers in dollars and not in millions. Round your answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
5)Record the adjusting entry for accrued interest on December 31, 2014. (Enter your answers in dollars and not in millions. Round your answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
6)Compute the present value of Catalin’s bonds, assuming that they had a 7-year life instead of a 10-year life. (Enter your answers in dollars and not in millions. Round your answer to the nearest dollar amount. Round time value factor to 4 decimal places.)
Explanation / Answer
Record the issuance of the bond on March 1, 2014. (Enter your answers in dollars and not in millions. If no entry 1)is required for a transaction/event, select "No journal entry required" in the first account field. Round time value factor to 4 decimal places.)
Semi Annual Interest = 40000000*5.8%*1/2
Semi Annual Interest = 1160000
Issue Price = Semi Annual Interest*PVIFA(rate,nper) + FV*PVIF(rate,nper)
Issue Price = 1160000*PVIFA(3%,20) + 40000000*PVIF(3%,20)
Issue Price = 1160000* 14.8775 + 40000000*0.5537
Issue Price = $ 39,405,900
Journal Entry
3)
Interest paid each six months =40000000*5.8%*1/2
Interest paid each six months = 1160000
Interest demanded by the market = 40000000*6%*1/2
Interest demanded by the market = 1200000
Difference between the interest paid each six months over the life of the bond and the interest demanded by the market = 1200000-1160000
Difference between the interest paid each six months over the life of the bond and the interest demanded by the market = $ 40000
Present value of the difference = Difference Amount*PVIFA(rate,nper)
Present value of the difference = 40000*PVIFA(3%,20)
Present value of the difference = 40000*14.8775
Present value of the difference = $ 595100
4)
Record the payment of interest on September 1, 2014
Interest Expenses = 39405900*3% = $ 1182177
Interest Payment in cash = 40000000*5.8%*1/2 = 1160000
Amortisation of Bonds Discount = 1182177-1160000 = 22177
Journal Entry
5)Record the adjusting entry for accrued interest on December 31, 2014.
Book Value after 1st interest payment = 39405900 + 22177 = 39428077
Interest Expensesfor 1st 4 month = 39428077 *6%*4/12 = 788562
Interest Payable for 1st 4 month = 1160000*4/6 = 773,333
Bonds Discount to be amortised = 788562-773333 = 15,229
Journal Entry
6)
Present value of Catalin’s bonds = Semi Annual Interest*PVIFA(rate,nper) + FV*PVIF(rate,nper)
Present value of Catalin’s bonds = 1160000*PVIFA(3%,14) + 40000000*PVIF(3%,14)
Present value of Catalin’s bonds = 1160000*11.2961 + 40000000*0.6611
Present value of Catalin’s bonds = 39,547,476
Account Title & Explaination Debit Credit Cash 39,405,900 Bonds Discount 594,100 Bonds Payable 40,000,000Related Questions
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