2) Monty Inc. manufactures cyeling equipment. Recently, the vice president of op

Question

2) Monty Inc. manufactures cyeling equipment. Recently, the vice president of operat company has requested construction of a new plant to meet the increasing demand company's bikes. After a careful evaluation of the request, the board of directors raise funds for the new plant by issuing S3 086,500 of 9%term corporate 2017, due on January 1.2032, with interest payable each January 1 and July 1, witn interest payment on July 1, 2017. At the time of issuance, the marke financial instruments is 10%. (Round factor values to 3 decimal places, eg. I answer to O decimal places, e.g. 458,581.) tions of the has decided to bonds on January 1, a) As the controller of the company, determine the selling price of the bonds. Create an amortization table for the first two years of the bond issuance

Explanation / Answer

Answer a Calculation of selling price of the bond Selling price of the bond = Present value of all future interest payments discounted at market rate + Present value of maturity amount of bond discounted at market rate Using present value of annuity formula , we can calculate the present value of all future interest payments Present value of annuity = P * {[1 - (1+r)^-n]/r} P = Semi annual interest payment = [$3086500 * 9%]/2 = $138892.50 r = market rate of interest per semi annual period = 10%/2 = 5% n = no.of semi annual periods = 15 years * 2= 30 Present value of annuity = 138892.50 * {[1 - (1+0.05)^-30]/0.05} Present value of annuity = 138892.50 * 15.372451 Present value of annuity = 21,35,118.15 Present value of all future interest payments = $21,35,118.15 Present value of maturity amount = Bond par value * Discount factor @ 5% at the end of 30th semi annual period Present value of maturity amount = $3086500 * [1/1.05^30] = $7,14,146.50 Selling price of bond = $2135118.15 + $714146.50 = $28,49,265 Answer b Amortization table for first two years of bond issuannce Date Interest payment [4.5% of Par] Interest expense [Market rate 5% of Previous BV in G] Amortization of bond discount [C-B] Debit balance in bond discount Credit balance in bond payable Book value of bond [F-E] A B C D E F G 01/01/2017 $237,235 $3,086,500 $2,849,265 30/06/2017 $138,893 $142,463 $3,571 $233,665 $3,086,500 $2,852,835 31/12/2017 $138,893 $142,642 $3,749 $229,915 $3,086,500 $2,856,585 30/06/2018 $138,893 $142,829 $3,937 $225,979 $3,086,500 $2,860,521 31/12/2018 $138,893 $143,026 $4,134 $221,845 $3,086,500 $2,864,655

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