(TCO D) On January 1, 2010, Ellison Co. issued 8-year bonds with a face value of
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Question
(TCO D) On January 1, 2010, Ellison Co. issued 8-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:
Instructions:
Calculate the issue price of the bonds.
Without prejudice to your solution in Part (a), assume that the issue price was $884,000. Prepare the amortization table for 2011, assuming that amortization is recorded on interest payment dates.
Present value of 1 for 10 periods at 10% .386 Present value of 1 for 10 periods at 12% .322 Present value of 1 for 20 periods at 5% .377 Present value of 1 for 20 periods at 6% .312 Present value of annuity for 10 periods at 10% 6.145 Present value of annuity for 10 periods at 12% 5.650 Present value of annuity for 20 periods at 5% 12.462 Present value of annuity for 20 periods at 6% 11.470Explanation / Answer
Rreq 1: ISSUE PRICE OF BONDS: Present values of Semi Annual interest for 16 periods at 12% (6% semiannual) 303177 ($30,000 * Annuity factor for 16 periods i.e. 10.1059) Present value of nominal value realised at end of 8 year 393600 ($1000,000* PVF at Year-8 i.e. 0.3936) ISSUE PRICE OF BONDS 696777 Req 2 Date Interest Discount Interest Unamortized Carrying Value paid Amortized Expense Discount Of bonds June30 2010 30000 7250 37250 108750 891250 Dec31 2010 30000 7250 37250 101500 898500 June 30 2011 30000 7250 37250 94250 905750 Dec 31 2011 30000 7250 37250 87000 913000 Note: Cash interest paid: 1000,000 *6%*6/12 = $ 30,000 Note: Straight line method of amortization of dsicount has been followed, as the issue pricec is not according the Present value. Total Discount: 1000,000 -884,000 =116,000 Number of period: 16 Discount amortized in each period: 116,000/16 = 7250 Interest expense = cash interest +Discount amortized
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