76since the bonds were issued at face value the

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Unformatted text preview: 4 from part [c] is essentially identical to the $114,324.20 just calculated. Amortizing discounts and premiums using the effective interest rate results in bonds being carried on the balance sheet at an amount equal to the present value of the bonds, using the effective interest rate on the date the bonds were issued as the discount rate. E11–15 a. Since it is one year later, two interest periods have passed. Thus, there are only eight remaining interest periods. Present value (i = 3%, n = 8) PV of face value ($20,000 0.7894 from Table 4 in Appendix A) PV of interest payments ($800 7.0197 from Table 5 in Appendix A) $15,788.00 5,615.76 Total present value $21,403.76 To determine whether Treadway has experienced an economic gain or loss, we need to know both the market value and the carrying value of the bonds. The market value of the bonds on December 31, 2011 should equal the present value of the bond's future cash flows discounted using the prevailing market interest rate. Thus, the market value of Treadway's bonds on December 31, 2011 is $21,403.76. Since the bonds were issued at face value, the effective interest rate on the date of issue equaled the stated interest rate, and there was no discount or premium associated with the bonds. When bonds are issued at face value, the bonds are carried on the books at face value until the bonds mature. Consequently, the book value of these bonds is $20,000.00. Since the market value of the bonds now exceeds $20,000.00, Treadway has experienced an economic loss. That is, if Treadway wanted to retire the bonds, it E11–15 Concluded would cost the company $21,403.76 rather than $20,000.00. The amount of the loss is the excess of the bond's market value over the bond's book value, or $1,403.76. b. Present value (i = 5%, n = 8) PV of face value ($20,000 0.6768 from Table 4 in Appendix A) PV of interest payments ($800 6.4632 from Table 5 in Appendix A) Total present value $13,536.00 5,170.56 $18,706.56 The market value of the bonds is now less than their book value. If Treadway Company wa...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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