Answer:
Compound Interest Bond
Explanation:
the company has issued compound interest bonds, compound equity bond that means that contains liability and equity. it has obtained the loan and the loan has been categorized at fair value.
we need to find out Equity portion in face value of bond so we solve as follows
We will identify the present value of interest payments and face value of bond at 10% yield
Face Value = 800000
Coupon Rate = 8%
IRR = 10% Annual = Semi Annual = 5%
Present Value of bond =
Cash Out flow At 8% = 64000 Annual
No of Outflows = 20
IRR =10
Present Value of the bond 8% interest at 10% with annuity formula:
P=R* (1-(1+I)^-n)/I = P=64000 *(1(1+10%)-20)/10%
= P=64000 *(1-0.14)/10% = 64000 * (0.8513/10%)
= P = 64000*5.5135 = 544868
Present Value OF Face Value At year O At 10% issued for 20 years :
P=800000/(1+10%)^20
P= 118115
present Value of the bond = 118115+544868 =663,783
Equity = Face Value - Present Value of liability
Equity = 800000-663783
Equity = 136,217
1) Price Of the bond = 663783
Journal Entry :
Cash 800000
Liability 663783
Equity 136217
To record the liability at present value
2) We need amortization schedule for this requirement
Amortization Schedule for first six months
Year Face Value IRR 6% CR8% Closing Value
6 months 663783 39827 -
Journal Entry
Interest Expense 39827
Liability 39827
To record the interest Expense 30 June 2016
3)
Year Face Value IRR 6% CR8% Closing Value
6 months 663783 39827 - 703610
6 months 703610 42217 -64000 681827
Journal Entry
Interest Expense 42217
Liability 21783
Cash 64000
To record the interest Expense 3 December 2016.
4)
Closing Value of the bond = 681827
Fair Value At 31-Dec-2016 = 668000
Gain on Fair valuation = 13827
Journal Entry
Liability 13827
Gain on Fair Valuation 13827
To record the fair valuation of bond at reporting date
