On January 1, 2001, Parker Company sold in exchange for cash, $25 million of bon

Question

On January 1, 2001, Parker Company sold in exchange for cash, $25 million of bonds payable to investors. The bonds mature on December 31, 2030, have a stated interest rate of 8%, and pay interest annually on December 31 of each year. The market interest rate was 6% on the date that Parker sold the bonds and is expected to fluctuate between 5% and 9% over the 30-year life of the bonds. As required by GAAP, Parker uses the effective interest method of amortizing any bond discount or premium.

Instructions (Answer all 7 Parts Below)

1. Use Excel (and only Excel) to prepare a table for Parker Company that shows the following for each of the 30 years in the life of the bonds: Interest Expense, Cash Paid as Interest, Discount or Premium Amortization, Remaining Unamortized Discount or Premium, and Carrying Amount of the Bonds. (Note: You must use only Excel to prepare and present all parts of this table. Do not use a hand-held calculator, and do not use the compound interest tables to solve any part of this problem.)

2. Record the journal entry for Parker Company on January 1, 2001 for the issuance of the bonds.

3. Record the journal entry for Parker Company that applies to interest on December 31, 2018.

4. Show how Parker Company would report the bonds payable in a balance sheet date December 31, 2018.

5. Does interest expense increase, decrease, or remain constant over the 30-year life of Parker Company’s bonds? Why does interest expense behave in the manner that you indicated?

6. How much would the Parker Company bonds sell for on January 1, 2001, if the stated rate was 4% instead of 8%?

7. On a separate tab in your Excel file, use the proper command in Excel to show all of your formulas instead of their calculated results. Turn in all your formulas on a separate sheet of paper along with your solution to 1 through 6 above.

Explanation / Answer

Present Value of Bonds Face Value $25,000,000 Coupon Rate 8.00% PMT $2,000,000 Nper 30 Rate 6.00% Present Value of Bonds $31,882,415.58 Premium on Bonds $6,882,415.58 A B C D E F G Period Interest Payment = 8% x face value Interest Expenses = 6% x previous Book value Amortization of Bonds Premium C-B Credit Balance in bonds Premium Account Credit Bal in Bonds Payable Book Value of Bonds F+ E 0 $6,882,415.58 $25,000,000 $31,882,415.58 1 $2,000,000 $1,912,944.93 -$87,055.07 $6,795,360.51 $25,000,000 $31,795,360.51 2 $2,000,000 $1,907,721.63 -$92,278.37 $6,703,082.15 $25,000,000 $31,703,082.15 3 $2,000,000 $1,902,184.93 -$97,815.07 $6,605,267.07 $25,000,000 $31,605,267.07 4 $2,000,000 $1,896,316.02 -$103,683.98 $6,501,583.1 $25,000,000 $31,501,583.1 5 $2,000,000 $1,890,094.99 -$109,905.01 $6,391,678.08 $25,000,000 $31,391,678.08 6 $2,000,000 $1,883,500.69 -$116,499.31 $6,275,178.77 $25,000,000 $31,275,178.77 7 $2,000,000 $1,876,510.73 -$123,489.27 $6,151,689.5 $25,000,000 $31,151,689.5 8 $2,000,000 $1,869,101.37 -$130,898.63 $6,020,790.87 $25,000,000 $31,020,790.87 9 $2,000,000 $1,861,247.45 -$138,752.55 $5,882,038.32 $25,000,000 $30,882,038.32 10 $2,000,000 $1,852,922.3 -$147,077.7 $5,734,960.62 $25,000,000 $30,734,960.62 11 $2,000,000 $1,844,097.64 -$155,902.36 $5,579,058.25 $25,000,000 $30,579,058.25 12 $2,000,000 $1,834,743.5 -$165,256.5 $5,413,801.75 $25,000,000 $30,413,801.75 13 $2,000,000 $1,824,828.1 -$175,171.9 $5,238,629.85 $25,000,000 $30,238,629.85 14 $2,000,000 $1,814,317.79 -$185,682.21 $5,052,947.65 $25,000,000 $30,052,947.65 15 $2,000,000 $1,803,176.86 -$196,823.14 $4,856,124.5 $25,000,000 $29,856,124.5 16 $2,000,000 $1,791,367.47 -$208,632.53 $4,647,491.97 $25,000,000 $29,647,491.97 17 $2,000,000 $1,778,849.52 -$221,150.48 $4,426,341.49 $25,000,000 $29,426,341.49 18 $2,000,000 $1,765,580.49 -$234,419.51 $4,191,921.98 $25,000,000 $29,191,921.98 19 $2,000,000 $1,751,515.32 -$248,484.68 $3,943,437.3 $25,000,000 $28,943,437.3 20 $2,000,000 $1,736,606.24 -$263,393.76 $3,680,043.54 $25,000,000 $28,680,043.54 21 $2,000,000 $1,720,802.61 -$279,197.39 $3,400,846.15 $25,000,000 $28,400,846.15 22 $2,000,000 $1,704,050.77 -$295,949.23 $3,104,896.92 $25,000,000 $28,104,896.92 23 $2,000,000 $1,686,293.82 -$313,706.18 $2,791,190.74 $25,000,000 $27,791,190.74 24 $2,000,000 $1,667,471.44 -$332,528.56 $2,458,662.18 $25,000,000 $27,458,662.18 25 $2,000,000 $1,647,519.73 -$352,480.27 $2,106,181.91 $25,000,000 $27,106,181.91 26 $2,000,000 $1,626,370.91 -$373,629.09 $1,732,552.83 $25,000,000 $26,732,552.83 27 $2,000,000 $1,603,953.17 -$396,046.83 $1,336,506 $25,000,000 $26,336,506 28 $2,000,000 $1,580,190.36 -$419,809.64 $916,696.35 $25,000,000 $25,916,696.35 29 $2,000,000 $1,555,001.78 -$444,998.22 $471,698.14 $25,000,000 $25,471,698.14 30 $2,000,000 $1,528,301.89 -$471,698.11 $0.02 $25,000,000 $25,000,000.02 2) Cash $31,882,415.58 Bonds Payable $25,000,000 Premium Bonds Payable $6,882,415.58 3) Premium Bonds Payable $4,191,921.98 Interest $4,191,921.98 4) Bonds Payable 2018 $25,000,000

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