Unformatted text preview: est expense for 2002 will be the effective rate of 6.7% multiplied by the proceeds of $380
million, or $25.46 million. This amount is made up of $25.025 million of cash paid plus $.435 million of
noncash interest from the amortization of the bond discount. c. The market paid less than $385 million for these bonds because the market demands 6.7% interest
for their investment dollars for the risk posed by the company at the time of issuance. The notes only
pay a cash interest rate of 6.5% and so the only way that investors can make their desired return is to
pay less for the notes. This allows the investors to make the market rate of 6.7%. E11–11
a. Bond A
Face value $
100,000 Present value (i = 3%, n = 20)
PV of face value
($100,000 0.55368 from Table 4 in Appendix A)
PV of periodic interest payments
($3,000 x 14.87747 from Table 5 in Appendix A)
Total present value (i.e., proceeds)
100,000
Discount/premium
0 $ 55,368
44,632 $ Bond B
Face value $
400,000 Present value (i = 3%, n = 20)
PV of face value
($400,000 0.55368 from Table 4 in Appendix A)
221,472
PV of periodic interest payments
($16,000 14.87747 from Table 5 in Appendix A)
238,040
Total present value (i.e., proceeds)
459,512
Premium
59,512
Bond C
Face value $ $
600,000 Present value (i = 4%, n = 10)
PV of face value $ ($600,000 0.67556 from Table 4 in Appendix A)
405,336
PV of periodic interest payments
($18,000 8.11090 from Table 5 in Appendix A)
145,996
Total present value (i.e., proceeds)
551,332
Discount
48,668 $ $ E11–11 Concluded
b. Immediately before a bond matures, its carrying value on the balance sheet must equal its face value.
Thus, discounts and premiums must be amortized over time so that the carrying value approaches the
bond's face value over time. For bonds that are issued at their face value, such as Bond A, the bond is
already stated at its face value and there is no discount or premium to amortize. Consequently, the
carrying value of the bond will remain equal to its face value over the life of the bond. Thus, the carrying
value of Bond A will remain constant over its life.
For bonds...
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 Fall '08
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 Accounting

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