On January 2, 2014, Floppy Co. issued 4% bonds with a face value of $400,000 whe
ID: 2470176 • Letter: O
Question
On January 2, 2014, Floppy Co. issued 4% bonds with a face value of $400,000 when the market interest rate was 6%. The bonds are due in ten years, and interest is payable every June 30 and December 31. Floppy does not elect the fair value option for reporting its financial liabilities. Use the following present value and present value annuity tables to calculate the selling price of the bond on January 2, 2014. Round your final answer to the nearest dollar. Present Value Ordinary Annuity of $1 Periods 3% 4% 6% 8% 12% 16% 5 periods 4.5797 4.4518 4.2124 3.9927 3.6048 3.2743 10 periods 8.5302 8.1109 7.3601 6.7101 5.6502 4.8337 20 periods 14.8775 13.5903 11.4699 9.8181 7.4694 5.9288 Present Value of $1 Periods 3% 4% 6% 8% 12% 16% 5 periods 0.8626 0.8219 0.7473 0.6806 0.5674 0.4761 10 periods 0.7441 0.6756 0.5584 0.4632 0.3220 0.2267 20 periods 0.5537 0.4564 0.3118 0.2145 0.1037 0.0514 Required: a. Selling price of the bond: b. Prepare the amortization schedule for the bond through December 31, 2015. Round all numbers to the nearest dollar.
Explanation / Answer
a.
Selling price of bonds = Present value of annuity of semi-annual coupon payments + Present value of face value
Semi annual coupon payments = $400,000 * 4% * ½ = $8,000
No. of payments = 10 years *2 = 20
Discounting rate = 6% /2 = 3%
Present value annuity factor of $1 at 3% for 20 periods = 14.8775
Present value of annuity of coupon payments = $8,000 * 14.8775 = $119,020
Present value factor of $1 at 3% for 20 periods = 0.5537
Present value of face value = $400,000 * 0.5537 = $221,480
Selling price of bond = $119,020 + $221,480 = $340,500
b.
Date
Interest payment
Interest expense
Amortization of discount on issue of bond
Book value of bonds
(Face value * 4% * 1/2)
(Previous Book value * 6% * 1/2)
(Interest expense - Interest payment)
(Previous book value + Amortization of discount)
02-Jan-14
$340,500
30-Jun-14
$8,000
$10,215
$2,215
$342,715
31-Dec-14
$8,000
$10,281
$2,281
$344,996
30-Jun-15
$8,000
$10,350
$2,350
$347,346
31-Dec-15
$8,000
$10,420
$2,420
$349,767
Date
Interest payment
Interest expense
Amortization of discount on issue of bond
Book value of bonds
(Face value * 4% * 1/2)
(Previous Book value * 6% * 1/2)
(Interest expense - Interest payment)
(Previous book value + Amortization of discount)
02-Jan-14
$340,500
30-Jun-14
$8,000
$10,215
$2,215
$342,715
31-Dec-14
$8,000
$10,281
$2,281
$344,996
30-Jun-15
$8,000
$10,350
$2,350
$347,346
31-Dec-15
$8,000
$10,420
$2,420
$349,767
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