Ripkin company issues 9%, five year bonds dated January 1, 2013, with a 320,000

Question

Ripkin company issues 9%, five year bonds dated January 1, 2013, with a 320,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of 332,988 there annual market rate is 8% on the issue date.

1. Compute the total bond interest expense over the bonds life.

2. Prepare and effective interest ammortization table like the one in Exhibit 14B.2 for the bonds life

3. Prepare the journal entries to record the first two interest paymens

4. Use the maket rate at innuance to compute the the present value of the remaining cash flows for these bonds as of December 31, 2015. Compare your answer with the amount shown on the amortization table as the balance for that date(from part 2) and explain your findings.

Explanation / Answer

Part 1)

The bond interest expense can be calculated with the use of following formula:

Total Bond Interest Expense = (Par Value*Coupon Rate*1/2*Number of Payments) - Amount of Premium

____________

Here, Par Value = $320,000, Number of Payments = 5*2 = 10, Coupon Rate = 9% and Amount of Premium = 332,988 - 320,000 = $12,988

Using these values in the above formula, we get,

Total Bond Interest Expense = (320,000*9%*10*1/2) - 12,988 = $131,012

____________

Part 2)

Effective Interest Amortization Table:

____________

Part 3)

The journal entries are as follows:

____________

Part 4)

We will have to calculate the present value of the remaining payments of $14,400 (6 Payments) and also the maturity value of $320,000.

The present value can be calculated with the use of PV function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Market Rate, Nper = Period, PMT = Interest Payment and FV = Par Value

____________

Here, Rate = 8%/2 = 4%, Nper = 3*2 = 6, PMT = 320,000*9%*1/2 = $14,400 and FV = $320,000

Using these values in the above function/formula for PV, we get,

Present Value as of December 31, 2015 = PV(4%,6,14400,320000) = $328,387.42

The present value calculated above is very near to the value as calculated in Part 2 (as on 31st December 2015)

Semi-Annual Interest Period Interest Payment (A) Interest Expense (B) (Book Value of the Previous Period*Market Rate*1/2) Amortization of Bond Premium (B-A) Book Value of the Bonds 1st Jan. 2014 332,988 30th June 2014 14,400 13,320 -1,080 331,908 31st Dec 2014 14,400 13,276 -1,124 330,784 30th June 2015 14,400 13,231 -1,169 329,615 31st Dec 2015 14,400 13,185 -1,215 328,400 30th June 2016 14,400 13,136 -1,264 327,136 31st Dec 2016 14,400 13,085 -1,315 325,821 30th June 2017 14,400 13,033 -1,367 324,454 31st Dec 2017 14,400 12,978 -1,422 323,032 30th June 2018 14,400 12,921 -1,479 321,554 31st Dec 2018 14,400 12,862 -1,538 320,016 or 320,000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.