Question

III. (6 Points) On June 1, 2016, Everly Bottle Company sold $3,000,000 in long- term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of $2,631,300 was determined from present value tables. Specifically explain how one would determine the price using present value tables. (c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.) IV, (5 Points) Rensing, Inc., has $800,000 of 4% preferred stock and $1,200,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2016 and 2017. As of December 31, 2018, it is desired to distribute $270,000 in dividends. Instructions Prepare a schedule showing how much the preferred and common stockholders will receive under each of the following assumptions: (a) The preferred is noncumulative and nonparticipating (b) The preferred is cumulative and nonparticipating The preferred is cumulative and fully participating. (d) The preferred is cumulative and participating to 7% total. (c)

Answer 1

Answer (a)

Face Value of the Bonds	$3,000,000
Book Value of Bonds	$2,631,300
Stated Interest Rate or Coupon Rate	8%
Yield or Market Rate	10%

Amortization Amount = Interest Expense - Interest Paid
Book Value or Current Balance is the carrying amount of the bond in the books of Everly Bottle Company.
Actual Interest Paid (in cash) = Face Value of Bonds X Stated Interest Rate
= $3,00,000 X 8% = $2,40,000
Interest Expense = Yield Rate X Book Value of Bond
For Year 1, Interest Expense = $2,631,300 * 10% = $263,130

For Year 1, Amortization amount = $263,130 - $240,000 = $23,130

Starting Book Value = Issuance Price of the Bonds ($2,631,300)
Book Value (next year) = Book Value (previous year) + Amortization amount
Book Value (Year 2) = Book Value (Year 1) + Amortization amount (Year 1)
= $2,631,300 + $23,130
= $2,654,430

	Book Value (or Current Balance)	Interest Paid	Interest Expense	Amortization Amount
Year 1	$2,631,300	$240,000	$263,130	$23,130
Year 2	$2,654,430	$240,000	$265,443	$25,443
Year 3	$2,679,873	$240,000	$267,987	$27,987
Year 4	$2,707,860	$240,000	$270,786	$30,786

Answer (b)
Interest Paid (every year) = $3,000,000 * 8% = $240,000
Discount Rate = Yield Rate = 10%
Redemption Amount to be paid at the end of 10 years = Face Value of Bond = $3,000,000
The present value table will look like this

Net Present Value	$2,631,326
Year 1	$240,000
Year 2	$240,000
Year 3	$240,000
Year 4	$240,000
Year 5	$240,000
Year 6	$240,000
Year 7	$240,000
Year 8	$240,000
Year 9	$240,000
Year 10	$3,240,000

NPV Rate 109 Value1 J13:22 Value2 1 1 1 = 0.1 = {240000;240000;240000;240000;2400... = number = 2631325.974

Answer (c)
On December 31, 2018, the adjusting entries will have to made for values taken from the table in the answer (a) above
Since 2.5 years will be over as on December 31, 2018 from the issue date of the bond,

Book Value (31st Dec-18) = Book Value (31st May-18) + Amortization Amount (Year 3) /2
= $2,679,873 + $27,987 / 2
= $2,689,202
Interest Expense (year ending 31st Dec-18) = Year 2 Expense / 2 + Year 3 expense / 2
= $2,65,443 /2 + $267,987 / 2
= $266,715