On January 1, 2014, TCU Utilities issued $1,010,000 in bonds that mature in 3 ye

Question

On January 1, 2014, TCU Utilities issued $1,010,000 in bonds that mature in 3 years. The bonds have a stated interest rate of 6 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 12 percent. The company uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

1) What was the issue price on January 1, 2014?

2) What amount of interest expense should be recorded on (a) June 30, 2014? and (b) December 31, 2014?

3) What amount of cash interest should be paid on (a) June 30, 2014? and (b) December 31, 2014?

4) What is the book value of the bonds on (a) June 30, 2014? and (b) December 31, 2014?

TABLE A.3 Future Value of $1 1.0375 1.0764 1.0425 1.0868 1.1330 1.1811 1.2313 1.2837 1.3382 1.3951 1.4544 1.5162 2.2989 1.1236 1.1910 1.2625 1.3382 1.0404 1.0612 1.0824 1.0816 1.1249 1.1449 1.2250 1.1025 1.1576 1.2155 1.2763 1.3401 1.4071 1.4775 1.1664 1.2597 1.1587 1.2021 1.2472 1.2939 1.3425 1.3928 1.4450 2.0882 1.1255 1.3108 1.1941 1.2299 1.2668 1.3048 1.2653 1.3159 1.3686 1.4233 1.5036 1.5938 1.6895 1.7908 3.2071 1.5007 1.6058 1.7182 1.8385 1.9672 3.8697 1.1487 1.1951 1.2190 1.4859 1.6289 2.1589 4.6610 1.8061 2.6533 1.1881 1.2950 1.2321 1.3676 1.5181 1.6851 1.8704 2.0762 2.3045 2.5580 1.2769 1.4429 1.6305 1.8424 2.0820 2.3526 2.6584 3.0040 3.3946 11.5231 1.3225 1.5209 1.7280 2.0736 1.4049 1.5735 1.7623 1.9738 2.2107 2.4760 2.7731 3.1058 9.6463 1.9531 2.4414 3.0518 3.8147 4.7684 5.9605 1.3310 1.4641 1.6105 1.7716 1.6890 1.9254 2.1950 1.5386 1.6771 1.8280 1.9926 2.1719 2.3674 5.6044 2.3131 2.1436 2.3579 2.5937 6.7275 2.8526 3.2519 3.7072 13.7435 3.0590 3.5179 4.0456 16.3665 2.9860 3.5832 4.2998 5.1598 6.1917 38.3376 9.3132 86.7362 8.0623

Explanation / Answer

1)semiannual yield = 12*6/12 = 6%

semiannual months = 3*2 = 6

Semiannual interest = 1010000 *.06 *6/12 = 30300

Issue price = (PVAF@6%,6 *Interest) +(PVF@6%,6 *Face value)

          = (4.9173 * 30300 ) +(.7050 * 1010000)

          = 148994.19+ 712050

          = 861,044.19

Dicount = 1010000 - 861044.19 = 148955.81

2)Interest expense

30 june = 51662.65

31 dec- 52944.41

3)cash interest = 30300 for both 30june and 31 dec

4)Book value

30june -882406.84

31 dec - 905051.25

A B C D E F G H Date Beginning value Interest Paid in cash (G* .03) Interest expense[A*.06] Amortization of discount Balance in discount account Face value Book value at end (G-H) 30 june 861044.19 30300   [1010000*.03] 51662.65   [861044.19*.06] 51662.65-30300= 21362.65 148955.81 - 21362.65 = 127593.16 1010000 882406.84 31 dec 882406.84 30300 52944.41 22644.41    [52944.41-30300] 127593.16-22644.41 = 104948.75 1010000 905051.25

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.