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Skysong Inc
Skysong Inc. manufactures cycling equipment. Recently, the company’s vice-president of operations has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,250,000 of 9% term corporate bonds on March 1, 2020, due on March 1, 2034, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 8%. As Skysong's controller, determine the selling price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)
Selling price of the bonds?
What is the basis of measurement for the bonds?
Is there any measurement uncertainty that requires disclosure in Skysong's financial statement notes?
Expert Solution
| 1.Face valueof the bond= $ 2250000 |
| Semi-annual Coupon payments, Pmt.=2250000*9%/2= $ 101250 |
| Semi-annual Yield to maturity or s/a market interest rate at time of issue= 8%/2=4% |
| n=no. of semi-annual coupon payment periods= 14 yrs.*2= 28 |
| so, using the formula to calculate the price of the bonds, |
| Price=(Pmt.*(1-(1+r)^-n)/r)+(FV/(1+r)^n) |
| ie. Price=(Pmt.*P/A,i=4%,n=28)+(FV*P/F,i=4%,n=28) |
| ie.(101250*16.66306)+(2250000*0.33348)= |
| 2437465 |
| P/A,i=4%,n=28----16.66306 & P/F,i=4%,n=28---0.33348 |
| It is a premium bond |
| ie. Issued at a premium of $ 2436475-2250000= $ 187465 |
| 2.The basis of measurement of the bond's cash flows is the |
| the market interest rate for similar financial instruments is 8%. |
| with which the future cash flows are discounted, for accounting/recognising the bond issue or the liability |
| 3. Measurement uncertainty means the uncertainty in the determination of the monetary value at which an item is recognised /accounted in books and disclosed in the final statements---- if the value is expected to change within a reasonably near term or period. |
| No.Skysong need not disclose any measurement uncertainty , as normally US GAAP requires the liabilities to be reported/accounted & amortised at initial measurement values(which is normally market interest rates) only & amortising premium or discount at the effective interest rates(which by itself takes care of the fair value at which it was recorded)--for example, long-term liabilities like mortgages, bonds payable |
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