Bonds Intel Inc. is the pioneer in the manufacture of microprocessors for comput
ID: 2484686 • Letter: B
Question
Bonds
Intel Inc. is the pioneer in the manufacture of microprocessors for computers. The company’s fiscal year runs from April 1 to March 31. On 4/1/2015, Intel Issued $5,000,000 of 11% Bonds due in 10 years. The interest is payable annually on April 1. The market rate of interest on that date for bonds of similar risk is 10%.
Prepare the journal entry for the issuance of the bonds and on the first interest payment date.
Use the Excel Template linked at the bottom of this page to prepare an amortization schedule for the bonds. Any written comments should be included in Excel’s comments function and formatted according to CSU-Global Guide to Writing and APA Requirements.
Stocks
Presented below is the stockholders’ equity section of AMR Corporation. All amounts are in millions except for number of shares and par value.
Stockholders' Equity (Deficit)
Current
Year
Prior
Year
Preferred stock - 20,000,000 shares authorized; none issued
$ -0-
$ -0-
Common stock - $1 par value; 750,000,000 shares authorized; 182,350,259 shares issued
182
182
Additional paid-in capital
2,521
2,605
Treasury shares at cost: current year-21,194,312; prior year-22,768,027
(1,308)
(1,405)
Accumulated other comprehensive loss
(664)
(785)
Accumulated deficit
(1,312)
(551)
$ (581)
$ 46
Explain why the common stock is classified as part of the stockholders’ equity.
Explain why treasury stock is not classified as an asset.
Explain what is meant by "Accumulated other comprehensive loss."
Why is the accumulated deficit larger in the current year than in the prior year?
Compute book value per share for AMR for the current year.
Stockholders' Equity (Deficit)
Current
Year
Prior
Year
Preferred stock - 20,000,000 shares authorized; none issued
$ -0-
$ -0-
Common stock - $1 par value; 750,000,000 shares authorized; 182,350,259 shares issued
182
182
Additional paid-in capital
2,521
2,605
Treasury shares at cost: current year-21,194,312; prior year-22,768,027
(1,308)
(1,405)
Accumulated other comprehensive loss
(664)
(785)
Accumulated deficit
(1,312)
(551)
$ (581)
$ 46
Explanation / Answer
Bonds
Annual interest = $5,000,000 * 11% = $550,000
Effective market rate = 10%
Since the market interest rate is less than the interest rate of bonds, the bonds must have been issued at premium. Issue price shall be the present value of annual interest payments and redemption value of bonds discounted using the effective market rate as discount rate.
Present value of annuity = Annuity * {1 – (1+r)-n}/r
Present value of annuity of annual interest payments over 10 years = $550,000 * (1 – 1.10-10)/0.10 = $550,000 * 6.1446 = $3,379,530
Present value of face value of bond to be redeemed after 10 years on maturity = $5,000,000/ 1.1010 = $5,000,000/2.5937 = $1,927,500
Issue price of bond = $3,379,530 + $1,927,500 = $5,307,030
Journal entries
Date
Account titles and explanation
Debit
Credit
April 1, 2015
Cash
$ 5,307,030
Bonds payable
$ 5,000,000
Premium on issue of bonds
$ 307,030
April 1, 2016
Interest expense
($5,307,030 * 10%)
$ 530,703
Premium on issue of bonds
$ 19,297
Cash
($5,000,000 * 11%)
$ 550,000
Amortisation schedule
Number of payments
Date of Payment
Payment Amount
Bond Interest Expense
Premium Amortisation
Unamortized Premium
Carrying Value of Bond
($5,000,000 * 11%)
(Carrying amount * 10%)
(Interest payment - Interest expense)
0
01-04-2015
307,030.00
5,307,030.00
1
01-04-2016
550,000.00
530,703.00
19,297.00
287,733.00
5,287,733.00
2
01-04-2017
550,000.00
528,773.30
21,226.70
266,506.30
5,266,506.30
3
01-04-2018
550,000.00
526,650.63
23,349.37
243,156.93
5,243,156.93
4
01-04-2019
550,000.00
524,315.69
25,684.31
217,472.62
5,217,472.62
5
01-04-2020
550,000.00
521,747.26
28,252.74
189,219.89
5,189,219.89
6
01-04-2021
550,000.00
518,921.99
31,078.01
158,141.87
5,158,141.87
7
01-04-2022
550,000.00
515,814.19
34,185.81
123,956.06
5,123,956.06
8
01-04-2023
550,000.00
512,395.61
37,604.39
86,351.67
5,086,351.67
9
01-04-2024
550,000.00
508,635.17
41,364.83
44,986.83
5,044,986.83
10
01-04-2025
550,000.00
504,498.68
44,986.84
(0.00)
5,000,000.00
Totals
5,500,000.00
5,192,455.52
307,030.00
Date
Account titles and explanation
Debit
Credit
April 1, 2015
Cash
$ 5,307,030
Bonds payable
$ 5,000,000
Premium on issue of bonds
$ 307,030
April 1, 2016
Interest expense
($5,307,030 * 10%)
$ 530,703
Premium on issue of bonds
$ 19,297
Cash
($5,000,000 * 11%)
$ 550,000