Martinez Furniture Company started construction of a combination office and warehouse building for its own use at an estimated c
ost of $7,500,000 on January 1, 2020. Martinez expected to complete the building by December 31, 2020. Martinez has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semi-annually, issued December 31, 2019, $3,000,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021, 2,100,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,500,000
Compute the avoidable interest on this project.
Compute the avoidable interest on this project.
1 answer:
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Answer:
Young should report proceeds from the sale of bonds as equal to $864,884
Explanation:
The proceeds on the sale of bonds is equivalent to the present value of all the cash flows that are likely to accrue to an investor once the bond is bought. These cash-flows are the periodic coupon payments that are paid semi-annually and the par value of the bond that will be paid at the end of the 5 years.
During the 5 years, there are 10 equal periodic coupon payments that will be made. In each year, the total coupon paid will be
and this payment will be split into two equal payments equal to . This stream of cash-flows is an ordinary annuity
The periodic market rate is equal to
The PV of the cashflows = PV of the coupon payments + PV of the par value of the bond
=$40,000*PV Annuity Factor for 10 periods at 4%+