** REQUIRED: 1) Determine the following items: a) balance of the discount accoun
ID: 2522059 • Letter: #
Question
** REQUIRED:
1) Determine the following items:
a) balance of the discount account at 4/1/18. 361242
b) amount of interest expense reported FYE 12/31/18. 316665
c) carry value of the bonds at 12/31/18. 2651496
d) total cost of borrowing over the life of the bond. 3976506
Here are the correct answers, can you please explain how they were computed.
Cardinals Co issued $3,000,000 of its 10%, 12-year bonds on their authorized date of 4/1/17. The bonds were issued at a price of $2,623,494 to produce an effective yield of 12%. Interest payments are made twice per year, 4/1 and 10/1, with discounts and premiums being amortized using the effective interest method.** REQUIRED:
1) Determine the following items:
a) balance of the discount account at 4/1/18. 361242
b) amount of interest expense reported FYE 12/31/18. 316665
c) carry value of the bonds at 12/31/18. 2651496
d) total cost of borrowing over the life of the bond. 3976506
Here are the correct answers, can you please explain how they were computed.
Explanation / Answer
Solution a:
Discount on bond issue = Face value - Issue price opf bond
= $3,000,000 - $2,623,494 = $376,506
From above schedule, discount amortised upto 1-apr-2018 = 7409.64+7854.22 = $15263.86
Balance of discount at 1-april-2018 = Total discount - discount amortised = $376506 - $15263.86 = $ 361242.14
Solution b):
From above schedule:
Interest expense from 1-Jan-2018 to 31-march-2018 recorded on 1-April-2018 = $157854.22 * 3/6 = $78927.11
Interest from 1-april-2018 to 30-sept-2018 recorded on 1-october-2018 = $158325.47
Accrued Interest expense from 1-october-2018 to 31-December-2018 = $158825 * 3/6 = $79412.50
Total interest expense reported FYE 12/31/2018 = $78927.11 + $158325.47 +$79412.50 = $316665.08
Solution c):
Carrying Value of bond on 1-october-2018 as per schedule in part b) = $2647083.33
Interest Expenses reported from 1-Oct-2018 to 31-Dec-2018 as calculated in b) part = $79412.50
Cash payment for actual interest due from 1-Oct-2018 to 31-Dec-2018 = $3000000* 10% * 3/12 = $75000
Discount amortised from 1-Oct-2018 to 31-Dec-2018 = $79412.50 - $75000 = $4412.50
Carrying Value of the bonds at 12/31/18 = Carrying value on 1-Oct-2018 + $4412.50 = $2647083.33+$4412.50 = $2651496
Solution d):
Face value = $3000000
Issue Price = $ 2623494
Discount on issue of Bond = Face value - Issue price = $3000000- $2623494 = $376506
Total Interest payments = $3000000 * 10% *12 = $3600000
Total cost of Borrowing = Total interest payment + Discount on issue of bond = $3600000+ $376506 = $3976506
Amortization Schedule of bond upto 1/4/2018- Effective Interest Method Date Cash Paid Interest Expense Discount Amortization Carrying Value 01-Apr-17 $26,23,494.00 01-Oct-17 $1,50,000.00 $1,57,409.64 $7,409.64 $26,30,903.64 01-Apr-18 $1,50,000.00 $1,57,854.22 $7,854.22 $26,38,757.86Related Questions
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