On January 1, 2017, Hi and Lois Company purchased 12% bonds, having a maturity value of $300,000, for $322,744.44. The bonds pro
vide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.
Required:
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.
Required:
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.
1 answer:
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Answer: The investor should be willing to pay <u>$927.68 </u>for the bond today.
We in need to compute the price at which the investor can sell the bond in year 10 (Y10).
The price of the bond in year 10 will be the present value of the coupons over the remaining life of the bond and the maturity value of the bond after 20 years.
We have
Coupon Value (C ) $50.00
No. of coupons remaining (n) 20
Expected YTM in year 10 0.08
Expected semi annual YTM in year 10
Face (Maturity) Value of the bond (MV) $1,000.00
The bond price in year 10 will be
Substituting the values we get,
<u>Hence the investor can expect to sell the bond in year 10 at $1,135.90.</u>
Now, we'll calculate the price the investor is willing to pay for the bond. The investor can expected to pay the Present Value of the coupons she'll receive over 10 years and the selling price of the bond 10 years from now. We discount the cash flows at the rate of return the investor expects.
We have
Coupon Value (C ) $50.00
No. of coupons remaining (n) 20
Expected rate of return 0.12
Expected semi annual rate of return
Selling Price of the bond (SP) $1,135.90
Substituting the values we get,
Answer:
The first one offers the best financial advantage
Explanation:
After reading carefully both offers, the first one does not imply any charges on the employee because both, health insurance and vacations, are full covered. On the other hand, when we analyze the second offer, despite the base salary is $5000 higher, the health insurance is deducted from the employee's pay check. Comparing both offers with numbers we have:
Finally, we can conclude that the first offer has a $720 advantage over the second one. Therefore, it is better to choose it.