On January 1 of this year Ikuta Company issued a bond with a

On January 1 of this year, Ikuta Company issued a bond with a face value of $160,000 and a coupon rate of 4 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 5 percent. Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required: 1. Complete a bond amortization schedule for all three years of the bond\'s life Cash Interest Interest Expense Discount Book Value of Amortization Date Bond Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2? Year 2 December 31 Interest expense Bond liability Year 1

Solution

1) Year Cash Interest Interest Expense Dicount amortization Book Value of bond Jan 01, Year 1 $       1,55,643 Dec 31, Year 1 $                        6,400 $             7,782 $       1,382 $       1,57,025 Dec 31, Year 2 $                        6,400 $             7,851 $       1,451 $       1,58,476 Dec 31, Year 3 $                        6,400 $             7,924 $       1,524 $       1,60,000 Working: a. When Bonds are issued at below their par value, it is called as bond issued at discount. Par Value of Bond $ 1,60,000.00 Current price of bond $ 1,55,642.80 Discount on bonds payable $       4,357.20 b. Cash Interest = Par Value x Coupon rate = $ 1,60,000.00 x 4% = $       6,400.00 c. Interest expense as per effective Interest method, Year Beginning Book Value Market Interest Rate Interest Expense Dec 31, Year 1 $            1,55,642.80 5% $ 7,782.14 Dec 31, Year 2 $            1,57,024.94 5% $ 7,851.25 Dec 31, Year 3 $            1,58,476.19 5% $ 7,923.81 d. Calculation of current price of bond Price of bond is the present value of cash flow from bond. At 5% market required return: Year Cash flow Discount factor Present Value 1-3 $       6,400                          2.7232 $     17,428.79 3 $ 1,60,000                          0.8638 $ 1,38,214.02 Current Price $ 1,55,642.80 e Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.05)^-3)/0.05 i 5% =               2.7232 n 3 f Present Value of 1 = 1.05^-3 =               0.8638 g. Coupon Interest paid in cash = Par Vale x coupon rate = $       1,60,000 x 4% = $             6,400 2) Year 1 Year 2 December 31 Interest Expense $             7,782 $             7,851 bond Liability $       1,57,025 $       1,58,476