Chapter 9
Liabilities and Interest
1
9-53
(25-40 min.)
1.
Proceeds equal the present values of interest and maturity
payments at the market rate:
Interest payment = 1/2 x 6% x $10,000,000 = $300,000
PV of interest payments, $300,000 x 8.1109*
$2,433,270
PV of maturity payment, $10,000,000 x .6756*
6,756,000
Proceeds
$9,189,270
*
From Tables 9A-3 and 9-A2, respectively, 4% column, 10-period row
Using a computer to avoid rounding errors, the present value is
PV of interest payments
$2,433,268.73
PV of maturity payment
6,755,641.69
Proceeds
$9,188,910.42
For the remainder of this problem we will use the numbers
derived from the tables.
If you used the more precise calculation,
your numbers will be just slightly different.
2.
First semi-annual interest expense,
4% x $9,189,270
$367,571
Semi-annual interest payment
300,000
Amortization of bond discount
$
67,571
Analysis of Bond Transactions
A
=
L
+
SE
Cash
=
Bonds
Payable
Discount on
Bonds
Payable
Retained Earnings
a.
Issuance
+9,189,270 = +10,000,000
–
810,730
b. First semi-annual
interest
– 300,000 =
+
67,571
–
367,571
⎥
⎥
⎦
⎤
⎢
⎢
⎣
⎡
Expense
Interest
Increase
c. Maturity value
–10,000,000
= –10,000,000
Bond related totals*
–
3,810,730
0
−
3,810,730
*
Bond totals include 10 semi-annual payments of $300,000
plus repayment
of $810,730 in excess of the original borrowing.