Chapter 10-Exercise 1 sal University Task Team: 1 A.shshani... 2...Faten...Asheh

Question

Chapter 10-Exercise 1 sal University Task Team: 1 A.shshani... 2...Faten...Ashehr On Jan 1, 2014, Prebish Corporation issued $1,500,000, 10 percent bond to yield 11 percent due on Jan 1, 2024. The interest is payable annually each Dec 31. On Jan 1, 2016, the company called the bond at 98% of face value and retired it. Requirements: Determine the price of the Prebish bonds when it was issued on Jan 1,2014 Prepare a complete amortization schedule for the bonds using the effective interest method until Jan 1, 2023 l. 2. Assuming there is no taxes, please compute the amount of loss,if any, to be recognized by Prebish as a result of retirement on Jan 1, 2016. 3.

Explanation / Answer

Solution 1:

Face value of bond issued = $1,500,000

Coupon rate = 10%

Yield = 11%

Maturity period = 10 years

Issue price of bond = Present value of interest and principal discounted at YTM.

= ($1,500,000*10%) * cumulative PF factor at 11% for 10 periods + $1,500,000 * PV Factor at 11% for 10th period

= $150,000 * 5.889232 + $1,500,000*0.352184 = $1,411,662

Solution 2:

Solution 3:

Call value of bond = $1,500,000*98% = $1,470,000

Carrying value of bond on 01.01.2016 = $1,422,809

Loss on retirement of bond = Call value - Carrying value = $1,470,000 - $1,422,809 = $47,191

Amortization Schedule of bond - Effective Interest Method Date Cash Paid Interest Expense Discount Amortization Carrying Value 1-Jan-14 $1,411,662 31-Dec-14 $150,000 $155,283 $5,283 $1,416,945 31-Dec-15 $150,000 $155,864 $5,864 $1,422,809 31-Dec-16 $150,000 $156,509 $6,509 $1,429,318 31-Dec-17 $150,000 $157,225 $7,225 $1,436,543 31-Dec-18 $150,000 $158,020 $8,020 $1,444,562 31-Dec-19 $150,000 $158,902 $8,902 $1,453,464 31-Dec-20 $150,000 $159,881 $9,881 $1,463,345 31-Dec-21 $150,000 $160,968 $10,968 $1,474,313 31-Dec-22 $150,000 $162,174 $12,174 $1,486,488 31-Dec-23 $150,000 $163,512 $13,512 $1,500,000

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