ABC Enterprises issues $400,000 of bonds paying a stated interest rate of 7%. The bonds are due in 10 years, with interest payab
2 answers:
Answer:
Present value of interest payments = $164,897.83
Present value of bond principal = $140,874.83
Total present value = $305,772.66
The bond was issued at premium.
Explanation:
Face value of the bond = $400,000
Interest rate = 7%
Annual interest payable = 7% of 400000
= $28,000
Present value adjusts the value of a future payment into today’s dollars.
We calculate the present value of annual payment of $28,000 for a period of 10years. This is an annuity and we shall calculate using the present value of annuity formula. We also find the present value of bond principal paid at the end of 10years.
Where:
I = annual interest payable = $28,000
r = discount rate or market interest rate = 11%
n = number of years = 10 years
Where:
P = Lump sum at maturity = $400000
r = discount rate = 11%
n = maturity period = 10 years
Total present value = 164897.83 + 140874.83
Total present value = $305,772.66
Since total present value is less than the face value of the bond of $400,000, it is safe to conclude that the bond was issued at a premium.
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Answer:
The correct answer is "43,000".
Explanation:
The given values are:
Carrying amount,
= $4060000
Face value,
= $3900000
Now,
For June 30, 2021, the Interest expense will be:
=
=
For June 30, 2021, the cash interest will be:
=
=
Now,
On June 30, 2021, the premium's amortization will be:
= Interest expense - Cash interest
=
=
On retirement, the cash paid will be:
=
=
On June 30, 2021, the less carrying amount will be:
= Carrying amount - amortization
=
=
Then,
The loss on retirement as well as ignoring taxes will be:
= Cash paid - less carrying amount
=
=