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Sweets and things issued the following debt on August 31, 2015 to finance a new

ID: 2465942 • Letter: S

Question

Sweets and things issued the following debt on August 31, 2015 to finance a new manufacturing facility for Chocolates: issued the following debt on August 31, 2015 to finance a new manufacturing facility for Chocolates:

1. Five year bonds with a stated rate of 5%. The face value of the bonds is $8,000,000 and interest is paid semiannually on Feb. 28 and August 31. The effective interest rate is 4%.

2. Four-year zero coupon bonds with a face value of $2,000,000. The effective rate on the bonds is 6% and interest is compounded semiannually.

3. Five-year bonds with a stated interest rate of 4% and a face value of $1,000,000. Interest is paid annually. The bond was exchanged for three machines with a total fair value of $915,796.

Question: Prepare amortization schedules for each bond through August 31, 2018

Explanation / Answer

(1) If

Face value, F = $8,000,000

Semi-annual coupon payment = $8,000,000 x 5% x (6/12) = $200,000

Semi-annual interest rate = 4% / 2 = 2%

Number of periods = 5 x 2 = 10

Bond's issue price ($) = Present value (PV) of future coupons + PV of face value

= 200,000 x PVIFA(2%, 10) + 8,000,000 x PVIF(4%, 5)

= 200,000 x 8.9826 + 8,000,000 x 0.8219

= 1,796,520 + 6,575,200

= 8,371,720

Bond premium = $(8,371,720 - 8,000,000) = $371,720

Amortization Schedule:

(2)

Semi-annual interest rate = 6% / 2 = 3%

Number of periods = 4 x 2 = 8

If V be the current value (price) of the bonds, then

V x (1.03)8 = $2,000,000

V x 1.2668 = 2,000,000

V = 1,578,818

Bond discount = $(2,000,000 - 1,578,818) = $421,182

Bond Amortization schedule:

NOTE: First 2 questions are answered.

Date Interest payment @2.5% x Face Value Interest expense @2% of Book Value Amortization of Premium Balance in Bond Premium Bond Payable Book Value of Bond (A) (B) (C) = (B) - (A) (D) (E) (F) = (D) + (E) Aug 31,2015 3,71,720 80,00,000 83,71,720 Feb 28, 2016 2,00,000 1,67,434 -32,566 3,39,154 80,00,000 83,39,154 Aug 31, 2016 2,00,000 1,66,783 -33,217 3,05,937 80,00,000 83,05,937 Feb 28, 2017 2,00,000 1,66,119 -33,881 2,72,056 80,00,000 82,72,056 Aug 31, 2017 2,00,000 1,65,441 -34,559 2,37,497 80,00,000 82,37,497 Feb 28, 2018 2,00,000 1,64,750 -35,250 2,02,247 80,00,000 82,02,247 Aug 31, 2018 2,00,000 1,64,045 -35,955 1,66,292 80,00,000 81,66,292