The Mariner company, a calender year corporation, issued $1,000,000 of 5% bonds

Question

The Mariner company, a calender year corporation, issued $1,000,000 of 5% bonds at a price generating a 4% yield. The bonds were dated January 1, 2006 and were issued that day. The bonds mature January 1, 2016. The bonds pay interest semi-annually January 1 and on June 30th of each year.

1.) Compute the selling price of ONLY the bonds (face amount excluding interest).

2.) What is the TOTAL amount of cash collected on the sale of the bonds on January 1, 2006?

3.) What is the amount of interest expense on the bonds for 2006 under the straight line method of amortizing any premiums or discount on the bond sale?

4.) What will be the interest expense on the bonds over the entire life of the bonds? Use excel and develop a spreadsheet using the straight line method and a spreadsheet using the effective interest rate method for the entire life of the bonds. Each spreadsheet should list the following: Date, Beginning carrying value, interest expense, cash paid, premium or discount amortized, ending carrying value.

5.) What is the gain or loss on the retirement of the bonds, assuming the bonds are redeemed at 102 plus accrued interest at June 1, 2010. Any premiums of discount is amortized under the straight line method.

Explanation / Answer

1. Selling price of only the bonds is (1,000,000 x 0.673) = $ 673,000

2. Total cash collected on the issue of the bonds = (25,000 x 16.352) + (1,000,000 x 0.673) = 408,800 + 673,000 = $ 1,081,800.

3. Interest expense per annum as per the straight line method = (25,000 - 81,800/20) = $ 20,910

4. The total interest expense over the life of the bonds is 20,910 x 20 = $ 418,200

The spreadsheet should look like this:

5. The loss on retirement of the bonds is $ 20,000

Period Beginning carrying value Intest expense Cash paid Premium amortized Ending carrying value $ $ $ $ $ 1 1,081,800 20,910 25,000 4,090 1,077,710 2 1,077,710, 20,910 25,000 4,090 1,072,810 3 1,072,810

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