10-2) Stacy Company issued five-year, 10% bonds with a face value of $10,000 on
ID: 2661118 • Letter: 1
Question
10-2) Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2012. Interest is paid annually on December 31. The market of interest on this date is 12%, and Stacy Company receives proceeds of $9,279 on the bond insurance. (For Information only) 10-3) Assume the same set of facts for Stacy Company as in problem 10-2 except that the market rate of interest of January 1, 2012, is 8% and the proceeds from the bond issuance equal $10,799 1) Prepare a five-year table (similar to exhibit 10-5) to amortize the premium using the effective interest method. 2) What is the total interest expense over the life of the bond? Cash interest payment? Premium amortization? 3) Identify and analyze the effect of the payment of interest and the amortization of premium on December 31,2014 (the third year), and determine the balance sheet presentation of the bonds on that date.Explanation / Answer
1)
On Jan 1, 2012 -
Bonds Payable of 10,000 less Bond Disc of 725 = Carrying Value of 9,279
Table headings are:
(A) Interest Paid (B) Interest Accrued (C) Amortization (D) Bond Disc (E) CV
On each Dec 31:
(A) is 1,000 (B) is 12% of CV at beginning of year (C) is B - A (D) = Beg Bal of 725 - C
and (E) = Beg Bal of 9,279 + C
Dec 31, 2010 - A = 1,000, B = 1,113, C = 113, D = 612, E = 9,388
Dec 31, 2011 - A = 1,000, B = 1,127, C = 127, D = 485, E = 9,515
Dec 31, 2012 - A = 1,000, B = 1,142, C = 142, D = 343, E = 9,657
Dec 31, 2013 - A = 1,000, B = 1,159, C = 159, D = 184, E = 9,816
Dec 31, 2014 - A = 1,000, B = 1,178, C = 178, D = 6, E = 9,994
Plus rounding of 6 - E = 10,000
The exact Market Rate was 12.01%, causing the rounding difference
b)
A 5 yr 10,000 Bond, at a coupon rate of 10%, and a market rate of at 8%, will sell for 10,799.
Annual interest payment will be 1,000.
Total interest expense over the 5 yrs will be 5,000 less 799, or 4,201.
Carrying Value - BB 10,799, Yr 1 - 10,663, Yr 2 - 10,516, Yr 3 - 10,357, Yr 4 - 10,186, Yr 5 - 10,000
Amortization - Yr 1- 136, Yr 2 - 147, Yr 3 - 159, Yr 4 - 171, Yr 5 - 186
You got 10,007 and 10,803 because of rounding. Best to carry out 6 places.
The Future Value, i.e. the Face Value, was 10,000, not 10,007.
Using a FV of 10,000, 5 yrs, at 8%, with 1,000 PMT, will get you a PV of 10,799.
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