Chapter 10- Exereise 2 Task Team: 2. Use the following information to answer que

Question

Chapter 10- Exereise 2 Task Team: 2. Use the following information to answer questions 1 to 5. On January 1 , 2007, Nahar Inc. issued 10-year, 1,000,000, 9% bonds with interest payable annually on Jan 1 of each year. On the issuing date, the market interest rate was 8% and the company premium. used the effective interest method to amortize any resultant discount or 1. For how much the bond was issued? 2. What was the carrying value of the bonds on December 31, 2008? 3 What was the total interest expense for the year ended on December 31,20102 4. What was the unamortized premium (discount) at December 31, 2011? 5. What was the carrying value of the bonds on December 31, 2012? 6. If the bond was purchased on Jan 1, 2015 at 103 of face value, what was the gain Closs) on the acquisition of the bond?

Explanation / Answer

1. Present Value of Bond = 90,000/(1.08)+....90000/(1.08)^10+ 1000000/(1.08)^10= 1067100.814$

The issue price of bond.

2. Carrying value of bond on 31 Dec 2008 =

Interest expense = 1067100*0.08= 85368$ but actual interest expense = 90,000$

Do the difference = 4632 is the premium amortisation and must be deducted from the actual cash interest expense and from the carrying value on Jan 1,2007.

So the carrying value on 31Dec 2007 = 1062468 = 1067100- 4632$

During 2008 actual interest expense = 90,000$

Interest expense based on carrying value = 1062468*0.08= 84997.44

Difference in interest = 90,000- 84997.44= 5002.56$ should be deducted from Jan 1,2008 carrying value.

Dec 31,2008 carrying value = 1057465.4$

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