HOMEWORK #8

Due Friday December 3, 5:00 pm

12 points

You should turn in your answers in ONE Excel document. Use financial formulas in Excel to show work for Requirement #1 and #5 of each part. An assignment submitted that doesnt demonstrate your formulas within Excel will receive an unsatisfactory grade.

PART A

Sparty Corporation issued seven-year, 8% bonds with a total face value of $1,000,000 on January 1, 2020. Interest is paid annually on December 31. The market rate of interest on this date was 6%. Sparty uses the effective interest rate method (the method we learned in class).

Required:

1. Using Excel, determine the proceeds of the bond sale on 1/1/20.

2. Using the present value of $1 table (found in Appendix E of your text or on-line) and the present value of an ordinary annuity of $1 table (found in Appendix E of your text or on-line), what factors would you use to calculate the present value of the face value of the bond and the coupon payments? For your own benefit, you may want to demonstrate that the price of the bonds is the same using the factors from the table that you got in Excel. You will find a difference due to rounding.

3. Did this bond sell at a premium or discount?

4. Using Excel, prepare a seven-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L. Use formulas and reference cells in Excel to show how you calculate your numbers.

5. Prepare journal entries to record (1) the initial sale of the bonds on January 1, 2020, (2) the interest payment for the period ended December 31, 2020 and, (3) the final interest and face value payment at maturity on December 31, 2026.

6. Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2021.

PART B

Bill Corporation issued four-year, 8% bonds with a total face value of $1,000,000 on January 1, 2020. Interest is paid semi-annually on June 30 and December 31. The market rate of interest on this date was 10%. Bill uses the effective interest rate method.

Required:

1. Determine the proceeds of the bond sale on 1/1/20. Explain your method of calculation.

2. Using the present value of $1 table (found in Appendix E of your text or on-line) and the present value of an ordinary annuity of $1 table (found in Appendix E of your text or on-line), what factors would you use to calculate the present value of the face value of the bond and the coupon payments? For your own benefit, you may want to demonstrate that the price of the bonds is the same using the factors from the table that you got in Excel. You will find a difference due to rounding.

3. Did this bond sell at a premium or discount?

4. Using Excel, prepare a four-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L. Use formulas and reference cells in Excel to show how you calculate your numbers.

5. Prepare journal entries to record (1) the sale of the bonds on January 1, 2020, (2) the interest payment for the period ended June 30, 2020 and, (3) the final interest and face value payment at maturity on December 31, 2023.

6. Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2021.