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Homework answers / question archive / On January 1, Shanghai Fashions issued $325,000 of 6%, 3-year bonds when the market rate of interest was 10%

On January 1, Shanghai Fashions issued $325,000 of 6%, 3-year bonds when the market rate of interest was 10%

Finance

On January 1, Shanghai Fashions issued $325,000 of 6%, 3-year bonds when the market rate of interest was 10%. The bonds pay interest semiannually on June 30 and December 31.

A. How much are the proceeds that Shanghai Fashions Company will receive on the issue date of the bonds?

B. Show an amortization table for the bond issue.

C. If the bonds are retired at the end of Year 2 at 104.5% of the maturity value, how much gain or loss on retirement will be reported? 

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A) Computation of Proceeds of Bonds or Present Value of Bonds:

Present Value of Bonds = Face Value / (1+ Interest Rate)^Number of Payments + Interest * [1-(1+ Interest Rate)^-Number of Payments] / Interest Rate 

= $325000 / (1+ 0.05)^(3*2) + (325000*6%/2) [1-(1+ 0.05)^(-3*2)] / 0.05

= $325000 / (1.05)^6 + 9750* [1-(1.05)^-6] / 0.05

= $325000 / (1.05)^6 + 9750* [1-1/(1.05)^6] / 0.05

= $325000 / 1.340096 + 9750* [1-1/1.340096] / 0.05

= $325000 / 1.340096 + 195000 * [1-1/1.340096]

= $242519.94 + $49488.04

Present Value of Bonds = $292,008

 

B) Amortization Schedule:      
Year Interest Payment  Interest Expense Discount Amortization Book value
  ($325,000*6%/2) (Book Value*10%/2) (Interest Expense-Interest Payment) (Book Value at the Beginning+Discount Amortization)
01-Jan - - - $292,008.00
June 30, Year 1 $9,750.00 $14,600.40 $4,850.40 $296,858.40
December 31, Year 1 $9,750.00 $14,842.92 $5,092.92 $301,951.32
         
June 30, Year 2 $9,750.00 $15,097.57 $5,347.57 $307,298.89
December 31, Year 2 $9,750.00 $15,364.94 $5,614.94 $312,913.83
         
June 30, Year 3 $9,750.00 $15,645.69 $5,895.69 $318,809.52
December 31, Year 3 $9,750.00 $15,940.48 $6,190.48 $325,000.00

 

C) Computation of Gain or Loss on Retirement of Bonds:

Bonds are Retired at the end of Year 2 at 104.5% = 104.5% * $325000 = $339625

Gain or Loss on Retirement = Bonds Retired Value - Book Value at End of Year 2

= 339625 - 312914

= $26711

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