Acct 414, Spring 2011
Professor tgordon
Serial Bonds Homework Assignment
I would like for you to set this up using a spreadsheet. To solve for the effective interest rate, use the Internal Rate
of Return function (IRR) of the spreadsheet. Excel has a reasonable discussion of how to set this up in their help file
(enter IRR in the help index). You might find the template used for the in-class example helpful.
You may work with one other person in the class, i.e., you may form a group of two (2). We will go over the first
two practice problems briefly in class (see syllabus) which will give you a chance to fix any errors before submission.
Problem 1 – Practice Problem
On 1/1/11, April Corporation issued semi-annual bonds with a coupon rate of 12% and face value of
$4,000,000. The terms of the bond specified that $1,000,000 would be repaid at the end of each year
beginning on 12/31/11. Interest will be paid on June 30 and December 31 of each year. Total proceeds
received from the Investment Banker totaled $3,892,000.
a.
Find the market rate of interest (yield rate) on the bond issue.
b.
Complete an amortization schedule using the effective interest method of amortizing bond
discounts/premiums.
c.
Prepare journal entries for 1/1/11, 6/30/11, 12/31/11, and 6/30/12; you might try to develop a template that
prepares journal entries automatically from the amortization table.
d.
Prepare an amortization schedule using the bonds outstanding method of amortizing bond
discounts/premiums
e.
Prepare journal entries on for 1/1/11, 6/30/11, 12/31/11, and 6/30/11; you might try to develop a template
that prepares journal entries automatically from the amortization table.
f.
The company did NOT adopt the fair value option for this debt. However, the fair value must be disclosed in
the financial statements. Assume the serial bonds are not publicly traded. Find the fair value at 6/30/11 if
the yield on bonds with comparable risk and maturities was 11.5% per annum.
Problem 2 – Practice Problem
On March 1, 2011, EGG Inc. issued $20,000,000 in serial bonds. The bond principal will be repaid in
$2,000,000 annual increments beginning March 1, 2012. The bonds pay interest semi-annually on March
1 and September 1. The coupon rate is 10% per annum. An investment banker handled the transaction
and you have just received a check for $22,585,000.
a.
Find the market rate of interest.
b.
Prepare an amortization schedule using the effective interest method of amortizing bond
discounts/premiums.
c.
Prepare journal entries on Sept. 1, 2011, December 31, 2011 (end of fiscal year), and March 1, 2012.
d.
Prepare an amortization schedule using the bonds outstanding method of amortizing bond
discounts/premiums.
e.
Prepare journal entries on Sept 1, 2005, December 31, 2011 (end of fiscal year), and March 1, 2012.
Note that this problem requires accrual of interest to properly match interest expense to the appropriate fiscal years.
Accordingly, you will need to modify the template you created to work Problem 3 (if you did your journal entries with
formulas in Excel).
HW02 Serial Bonds S11.docx as of 1/13/11
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Acct 414, Spring 2011
f.
Professor tgordon
The company did NOT adopt the fair value option for this debt. However, the fair value must be disclosed in
the financial statements. Assume the serial bonds are not publicly traded however serial bonds with similar
terms and risk have the following yield rates shown in the following table. Find the approximate fair value
of the serial bonds at each date.
March 31, 2011 (end of first quarter)
June 30, 2011 (end of second quarter)
December 31, 2011 (end of fiscal year)
8.50% per annum
7.75% per annum
9.25% per annum
Problem 3
Turned in items a through e as HW #2
Turn in item f as part of HW #3
On April 1, 2011, Warfield Inc. issued $40,000,000 in serial bonds. The bond principal will be repaid in
$5,000,000 annual increments beginning April 1, 2012. The bonds pay interest semi-annually on October
1 and April 1. The coupon rate is 10% per annum. An investment banker handled the transaction and you
have just received a check for $38,667,500.
a.
Find the market rate of interest.
b.
Prepare an amortization schedule using the effective interest method of amortizing bond
discounts/premiums.
c.
Prepare journal entries on October 1, 2011, December 31, 2011 (end of fiscal year), and April 1, 2012.
d.
Prepare an amortization schedule using the bonds outstanding method of amortizing bond
discounts/premiums.
e.
Prepare journal entries on October 1, 2011, December 31, 2011 (end of fiscal year), and April 1, 2012.
f.
The company did NOT adopt the fair value option for this debt. However, the fair value must be disclosed in
the financial statements. Assume the serial bonds are not publicly traded however serial bonds with similar
terms and risk have the following yield rates shown in the following table. Find the approximate fair value
of the serial bonds at each date.
December 31, 2011 (end of fiscal year)
10.5% per annum
December 31, 2012 (end of fiscal year)
9.25% per annum
December 31, 2013 (end of fiscal year)
12.0% per annum
HW02 Serial Bonds S11.docx as of 1/13/11
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