Please show all work On January 1, 2014, Shields, Inc., issued $900,000 of 9%, 2
ID: 2713802 • Letter: P
Question
Please show all work
On January 1, 2014, Shields, Inc., issued $900,000 of 9%, 20-yeai bonds for $989,067, yielding a market (yield) rate of 8%. Semiannual interest is payable on June 30 and December 31 of each year. Show computations to confirm the bond issue price. Indicate (he financial statement effects using the template for (1) bond issuance, (2) semiannual interest payment and premium amortization on June 30.2014. and (3) semiannual interest payment and premium amortization on December 31.2014.Explanation / Answer
K =Nx2
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^(Nx2)
k=1
K= 20x2
BOND PRICE= [(9*900000/(100*2))/(1 + 8/200)^k] + 900000/(1 + 8/200)^20x2
k=1
= 989067
At time of issuance:
989067 recorded as debt on balance sheet
and same value recorded as cash from financing activity on cash flow statement
At june 30 2014
Cash outflow from operating activities - coupon payment = 9*900000/(100*2) = 40500
On income statement : interest payment = carring value of debt * market rate at time of issuance
= 989067 * 8/200 = 39562.68
amortization of carrying value of debt on balance sheet = coupon payment - interest payment
= 40500 - 39563.68 = 937.32
Carrying value of debt in balance sheet = debt - amortization = 989067 - 937.32 = 988129.68
At dec 31 2014
Cash outflow from operating activities - coupon payment = 9*900000/(100*2) = 40500
On income statement : interest payment = carring value of debt * market rate at time of issuance
= 988129.68* 8/200 = 39525.187
amortization of carrying value of debt on balance sheet = coupon payment - interest payment
= 40500 - 39525.187= 974.812
Carrying value of debt in balance sheet = debt - amortization = 989067 - 974.812= 988092.1872
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