1) Red Corp issues $1,000,000, 8% five year bonds with interest paid semiannuall
ID: 2651256 • Letter: 1
Question
1) Red Corp issues $1,000,000, 8% five year bonds with interest paid semiannually. The current market rate of interest is 10%.
• Required:
Compute the price of the bond
Compute the discount/premium
Record the issuance of the bonds
Record the first interest payment including straight line amortization.
After 2 years, the company redeems the bonds at $1,040,000. Record the transaction.
2) ABC Corporation uses the indirect method to prepare its statement of cash flows. Data related to cash activities for last year is as follows:
Net income $92,500
Dividends paid (cash) $50,100
Depreciation expense $14,000
Net decrease in current assets $21,700
Issued new notes payable for cash $41,700
Paid cash for building $271,000
Net decrease in current liabilities $5,700
Sold investment for cash $400,000
1) What was the net cash flow from operating activities for the year?
2) What was the cash flow from (or used for) investing activities for the year?
3) What was the cash flow from (or used for) financing activities for the year?
4) What was the net change in cash for the year?
5) If the beginning balance of cash for the year was $158,000, what was the balance of cash at the end of the year?
Explanation / Answer
Current Market Price of the bond
Face Value of the bond = $1000000
Coupon Rate = 4% half yearly = 1000000 x 4% = $40000
Market rate of interest = 10 % p.a = 5% half yearly
Current Market Price
= $40000 x PVIFA (4%, 10) + $1000000 x PVIF (4%, 10)
= $40000 x 7.722 + $1000000 x 0.614
= $922880
The bond is a Discount Bond as the current market price is less than the face value of the bond.
Discount = $1000000 - $922880 = $77120
Journal Entry for the issuance of the bond:
Cash Dr. $922880
Discount on bond Payable Dr. $77120
Bond Payable Cr. $1000000
(being the bond of face value $1000000 issued at a discounted price of $922880)
Journal Entry for first interest payment including straight line amortization:
Interest Expense Dr. $47712
Discount on Bond Payable Cr. $7712
Cash Cr. $40000
(Being the issuance of the first half yearly interest made by amortizing $7712 (77120/10) of the discount payable on bond)
Journal Entry for Reedeming the bonds after 2 years:
After 2 years the discount on bonds payable will be amortized = 4 x 7712 = $30848
The amount that will be left in the Discount on Bonds Payable yet to be amortized = 77120 - 30848 = $46272
The Journal entry:
Bonds Payable Dr. $1000000
Loss on Retirement of bonds Dr. $ 46272
Discount on Bonds payable $ 46272
Cash $ 1000000
(Being the bonds redeemed at the end of 2 years)
Part 2)
Cash Flow From Operating activities:
Net Income $92500
Add:
Depreciation $14000
Net Decrease in Current Assets $21700
$128200
Less:
Net Decrease in Current Liabilities $ 5700
Cash Flow from Operating Activities: $122500
Cash Flow from Investing Activities:
Sold Investments for Cash $400000
Less: Purchase of building for cash $271000
Cash Flow from Investing Activities $129000
Cash Flow from Financing Activities $ 41700
(Issue of notes payable for cash )
Net Change in Cash For the Year (Inflow) $293200
Cash Balance at the beginning $158000
Cash Balance at the end of the year $451200
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