Question

Accounting for Bonds Sold at a Discount

The Biltmore National Bank raised capital through the sale of $150 million face value of eight percent coupon rate, ten-year bonds. The bonds paid interest semiannually and were sold at a time when equivalent risk-rated bonds carried a yield rate of ten percent.

Calculate the proceeds that The Biltmore National Bank received from the sale of the 8% bonds.
Round your answer to the nearest dollar.

$Answer

How will the bonds be disclosed on Biltmore’s balance sheet immediately following the sale?
Round your answers to the nearest dollar.

Balance sheet disclosure (following sale):

Bonds payable	$Answer
Less: Bonds discount (enter as negative)	$Answer
Bonds payable(net)	$Answer

Calculate the interest expense on the bonds for the first year that the bonds are outstanding.
Do not round until final answer. Round answers to the nearest dollar.

First six months	$Answer
Second six months	$Answer

Calculate the book value of the bonds at the end of the first year.
Do not round until final answer. Round answer to the nearest dollar.

$Answer

Answer 1

a). Proceeds = [Face Value x (1 + r)^(-n)] + [coupon x {1 - (1 + r)^(-n)} / r]

= $150,000,000 x 1.05^-20 + [$150,000,000 x 4% x {1 - 1.05^-20}/ 0.05]

= $56,533,422.43 + $74,773,262.06 = $131,306,684.50 or $131,306,685

b).Balance sheet disclosure (following sale):

Bonds payable 150,000,000

Less: Bond discount (18,693,315)

Bonds payable (net) 131,306,685

c). First six months: bond price x Interest rate = $131,306,685 x 5% = $6,565,334

Second six months = [{bond price x (1 + r)} - coupon payment] x yield

= [($131,306,685 x 1.05) - $6,000,000] x 5% = $6,593,601

d). book value of the bonds at the end of the first year

= [{bond price x (1 + r)^2} - {coupon x (1 + r)} - coupon]

= [($131,306,685 x 1.05^2) - ($6,000,000 x 1.05) - $6,000,000]

= $144,765,620.20 - $6,300,000 - $6,000,000 = $132,465,620