2. Bond computations: Straight-line amortization Southlake Corporation issued $9
ID: 2471416 • Letter: 2
Question
2. Bond computations: Straight-line amortization
Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow.
• Case A—The bonds are issued at 100.
• Case B—The bonds are issued at 96.
• Case C—The bonds are issued at 105.
Southlake uses the straight-line method of amortization.
Instructions:
Complete the following table:
Case A Case B Case C
a. Cash inflow on the issuance date _______ _______ _______
b. Total cash outflow through maturity _______ _______ _______
c. Total borrowing cost over the life of the bond issue _______ _______ _______
d. Interest expense for the year ended December 31, 20X1 _______ _______ _______
e. Amortization for the year ended December 31, 20X1 _______ _______ _______
f. Unamortized premium as of December 31, 20X1 _______ _______ _______
g. Unamortized discount as of December 31, 20X1 _______ _______ _______
h. Bond carrying value as of December 31, 20X1 _______ _______ _______
Explanation / Answer
Case A Case B Case C Cash inflow on the issuance date 900,000 8,64,000 94, 5000 Total cash outflow through maturity $900,000 + (900,000 x 8% x 10) = $1,620,000 $1,620,000 $1,620,00 Total borrowing cost over the life of the bond issue 900,000 x 8% x 10 = $720,000 756,000 $675,000 Interest expense for the year ended December 31, 20X1 Ten months of interest expense has accrued. 900,000 x 8% x 10/12 = $600,000 $63,000 56,250 Amortization for the year ended December 31, 20X1 0 $3,000 $3,750 Unamortized premium as of December 31, 20X1 0 0 $41,250 Unamortized discount as of December 31, 20X1 0 $33,000 0 Bond carrying value as of December 31, 20X1 $90,000 $867,000 $941,250
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