Fixed Gear Brewing, Inc. purchased $300,000 of eight-year, 45% IPA Corporation b
ID: 2582427 • Letter: F
Question
Fixed Gear Brewing, Inc. purchased $300,000 of eight-year, 45% IPA Corporation bonds on July 1 , 2015. Interest on the bonds is paid on January 1 and July 1 of each year. The yield on the bonds was 4%. The selling price of the bonds at 12/31/15,12/31/16 and 12/31/17 were 101,99 and 98 respectively. Required: Prepare an amortization schedule for the entire life of each bonds using Excel. How can you tell if your amortization table is correct? Show what would have been reported on the balance sheet, income statement, statement of comprehensive income and statement of cash flow assuming the investment was classified as a held to maturity (HTM), an available-for-sale (AFS) and a trading security (TS) at December 31 2017. Present the cash flow information under both the direct and indirect methods. 1. 2.Explanation / Answer
Fixed Gear Brewing, Inc If we amortized the premium by straight-line method, the table will apear as follows Year Interest Payment(A) PVIF@2% Present value of future cash flow Interest Expense B=A-C Amortisation of Bond Premium C=3.4/16 Balance in Bond Premium(D=Previous Value-C Bonds receivable Account( E) Book Value of Bonds(F=D+E) 0 1 3.40 100 103.40 0.5 2.25 0.980392 2.20588235 2.0375 0.2125 3.19 100 103.19 1 2.25 0.961169 2.16262976 2.0375 0.2125 2.97 100 102.97 1.5 2.25 0.942322 2.12022525 2.0375 0.2125 2.76 100 102.76 2 2.25 0.923845 2.07865221 2.0375 0.2125 2.55 100 102.55 2.5 2.25 0.905731 2.03789432 2.0375 0.2125 2.34 100 102.34 3 2.25 0.887971 1.99793561 2.0375 0.2125 2.12 100 102.12 3.5 2.25 0.87056 1.9587604 2.0375 0.2125 1.91 100 101.91 4 2.25 0.85349 1.92035334 2.0375 0.2125 1.70 100 101.70 4.5 2.25 0.836755 1.88269935 2.0375 0.2125 1.49 100 101.49 5 2.25 0.820348 1.84578367 2.0375 0.2125 1.27 100 101.27 5.5 2.25 0.804263 1.80959184 2.0375 0.2125 1.06 100 101.06 6 2.25 0.788493 1.77410965 2.0375 0.2125 0.85 100 100.85 6.5 2.25 0.773033 1.73932318 2.0375 0.2125 0.64 100 100.64 7 2.25 0.757875 1.70521881 2.0375 0.2125 0.42 100 100.42 7.5 2.25 0.743015 1.67178314 2.0375 0.2125 0.21 100 100.21 8 2.25 0.728446 1.63900308 2.0375 0.2125 0.00 100 100.00 8 100 0.7285 72.85 Bond Issue Price 103.400 It means Bond of 100 at premium of 3.4 each Our amortization table is correct since Bond Value at the time of maturity becomes its face value Report Balance sheet Income Statement Statement of Comprehensive Income Statement of Cash flow Classification of Investment Held to Maturity 102.34 4.5 0 Cash flow from Investing Activities=4.5 An available for Sale 98 4.5 -5.4 Cash flow from Investing Activities=4.5 Trading Security 98 =4.5+(-1) 0 Cash flow from Investing Activities=4.5 In held to Maturity It is classified at Bond value i.e. at issue price-Premium amortized till date In an available for sale securities, classification is done at fair value i.e Market Value and any unrealised gain or loss has to be reported in Statement of comprehensive Income In trading security, classification is done at fair value and any unrealised gain or loss compared to last year's fair value has to be recoginised in Income statement. Income statement will always include actual Interest Income received during the year Actual cash flow happening is only 4.5 in the cash flow statement rest any unrealised gain or loss should be deducted or added back to Profit Before tax amount in the cash flow statement If we amortized the premium by effective Interest method, the table will apear as follows Year Interest Payment(A) PVIF@2% Present value of future cash flow Interest Expense(B=F*2% Amortisation of Bond Premium( C=A-B) Balance in Bond Premium(D=Previous Value-C Bonds receivable Account( E) Book Value of Bonds(F=D+E) 0 1 3.40 100 103.40 0.5 2.25 0.980392 2.20588235 2.067996919 0.18200308 3.22 100 103.22 1 2.25 0.961169 2.16262976 2.064356858 0.18564314 3.03 100 103.03 1.5 2.25 0.942322 2.12022525 2.060643995 0.18935601 2.84 100 102.84 2 2.25 0.923845 2.07865221 2.056856875 0.19314313 2.65 100 102.65 2.5 2.25 0.905731 2.03789432 2.052994012 0.19700599 2.45 100 102.45 3 2.25 0.887971 1.99793561 2.049053892 0.20094611 2.25 100 102.25 3.5 2.25 0.87056 1.9587604 2.04503497 0.20496503 2.05 100 102.05 4 2.25 0.85349 1.92035334 2.04093567 0.20906433 1.84 100 101.84 4.5 2.25 0.836755 1.88269935 2.036754383 0.21324562 1.62 100 101.62 5 2.25 0.820348 1.84578367 2.032489471 0.21751053 1.41 100 101.41 5.5 2.25 0.804263 1.80959184 2.02813926 0.22186074 1.19 100 101.19 6 2.25 0.788493 1.77410965 2.023702045 0.22629795 0.96 100 100.96 6.5 2.25 0.773033 1.73932318 2.019176086 0.23082391 0.73 100 100.73 7 2.25 0.757875 1.70521881 2.014559608 0.23544039 0.49 100 100.49 7.5 2.25 0.743015 1.67178314 2.0098508 0.2401492 0.25 100 100.25 8 2.25 0.728446 1.63900308 2.005047816 0.25 0.00 100 100.00 8 100 0.7285 72.85 Bond Issue Price 103.400 It means Bond of 100 at premium of 3.4 each We appreciate the rating of our answers Thank You
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