Suppose that World Corp. signs a contract to build a lumber processing plant in Siberia. If World Corp. signs a second contract
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Answer:
cash 879,172 debit
bonds payble 800,000 credit
premium on BP 79,127 credit
--to record issuance--
Interest expense 35,166.84 debit
premium on BP 833.16 debit
cash 36,000 credit
--to record first interest payment--
Interest expense 35133.52 debit
premium on BP 866.48 debit
cash 36,000 credit
--to record second interest payment--
<em><u>Financial Statement effect:</u></em>
<em><u>Cash flow:</u></em>
financing:
proceed from bonds 879,172
interest paid 72,000
<em><u>Net income</u></em>
interest expense 35,133.52 + 35,166.84 = 70.250,36
<em><u>Balance sheet</u></em>
Bonds payable 800,000
Premium on Bonds 77,471
Explanation:
The price will be the discounted future coupon and maturity payment at market rate
C 36,000.000 (800,000 x 9% x 1/2)
time 40 ( 20 years x 2)
rate 0.04 (8% x 1/2)
PV $712,539.8598
Maturity 800,000.00
time 40.00
rate 0.04
PV 166,631.24
PV c $712,539.8598
PV m $166,631.2357
Total $879,171.0955
The interest expense will be the carrying value times market rate
the cash outlay will be the same for each period:
principal x coupon rate x half-year as payment are semiannual.
800,000 x 0.09 x 1/2 = 36,000
The difference between each one will determinate the amortization onthe premium