Klausenheimer Inc. issued $50 million of 6% three-year bonds, with coupon paid a
ID: 2426875 • Letter: K
Question
Klausenheimer Inc. issued $50 million of 6% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2 and 3 was 10%, 6%, and 3%. Determine the coupon, present value (fair value) interest, unrealized gain/loss (amortization), and total expense for each of the three years (using the amortized cost method and the fair value method) and complete the table below.
Assume Klausenheimer’s management is interested in reducing net income as much as possible for the next year. What method can help Klausenheimer to achieve this?
C1. Calculation Question (15 points Klausenheimer Inc. issued $50 million of 6% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2 and 3 was 10%, 6%, and 3% Determine the coupon, present value (fair value) interest, unrealized gain/loss (amortization), and total expense for each of the three years (using the amortized cost method and the fair value method) and complete the table below. Assume Klausenheimer's management is interested in reducing net income as much as possible for the next year. What method can help Klausenheimer to achieve this? Amortized Cost Interest Rate 10% Present Value Premium Discount Amorti Interest Total Year Coupon zation 0 50.00 0.00 Total Fair Value Accounting Fair Value Unrealized Total Gain/Loss Epense Interest Rate 1096 6% 3% Interest Year 0 Coupon TotalExplanation / Answer
Year Coupan Intt PV Factor Present Value 1 3 0.909 2.73 2 3 0.890 2.67 3 3 0.915 2.75 3 50 0.915 45.76 53.90 Journal Entry Cash Dr 53.90 Bonds Payble Cr 50 Premium on bonds Cr 3.90 Amortised Cost Year Coupan Intt Market Intt Amortisation of bond prenium Credit Balance in Prem Credit Balance in Bond payble Book Value 0 3.90 50 54 1 3 4.31 1.31 5.21 50 55 2 3 1.16 -1.84 3.37 50 53 3 3 0.27 -2.73 0.00 50 50
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