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Timken Company issues a $1,500,000 bond at 10% for 10 years
Timken Company issues a $1,500,000 bond at 10% for 10 years. The market interest rate is 9%.
Required:
1. What is the issue price of these bonds and the bond discount or premium? Assume semi-annual interest payments.
2. Assume that Timken uses the effective interest method to amortize the bond discount or premium for the semiannual interest payments, what is the interest expense and the amount of cash paid on the first interest payment?
6. On December 31, year 1, Day Co. leased a new machine from Parr with the following pertinent information:
Lease term 8 years
Annual rental payable at beginning of each year $60,000
Useful life of machine 10 years
Day's incremental borrowing rate 15%
Implicit interest rate in lease (known by Day) 12%
The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $425,000.
Required:
At the beginning of the lease term, what should Day record as a lease liability?
Expert Solution
5-1) Computation of Issue Price of Bond:
|
Particulars |
Amount |
|
Present Value of Semiannual interest of $75,000 for 10 years |
$975,600 |
|
(75,000*13.008(Cumulative factor of 20 periods of 4.5%) |
|
|
Present value of a single payment at the Maturity date |
|
|
$1,500,000 *.415(Factor at end of 20th period of 4.5%) |
$622,500 |
|
$1,598,100 |
5-2) Amortization of Bond Premium and Interest payment are shown as below:
|
A |
B |
C |
D |
E |
F |
|
|
Semiannual Interest Period |
Carrying Value at beginning of period |
Semiannual Interest Expense at 9% to be recorded |
Semiannual Interest payment to bondholders |
Amortization of Bond Premium |
Unamortized Bond Premium at end of Period |
Carrying Value at end of period |
|
(9%/2) 4.5% of A |
(10%/2) 5% of 1,500,000 |
(C-B) |
(E-D) |
(A-D) |
||
|
0 |
$98,100 |
$1,598,100 |
||||
|
1 |
$1,598,100 |
$71,915 |
$75,000 |
$3,085 |
$95,015 |
1,595,015 |
Workings:
Semi-Annual interest payments = Face value of bonds * Face interest rate* Time
= $1,500,000 *.10*.5
= $75,000
6) Computation of Lease Liability at the beginning of the lease term:
| Annual Rental payout - $ 60,000 |
| Present value of an annuity of 1 in advance for 8 periods at |
| 12% - 5.56376 |
| So the value is $ 60,000 * 5.56376 |
| The amount to be recognized as lease liability is $ 333,826.00 |
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