Clovis Company recently issued $500,000 (face value) bonds to finance a new construction project. The company’s chief accountant prepared the following bond amortization schedule:

Required:

1. Compute the discount or premium on the sale of the bonds, the semiannual coupon interest rate, and the semiannual effective interest rate.

2. The company’s vice president of finance wants any discount (or premium) at issuance of the bonds to be recorded immediately as a loss (or gain) at the issue date. Do you agree with this approach? Why or why not?

3. On December 31, 20X3, the bonds’ net carrying value is $522,258. In present value terms, what does this amount represent?

4. Suppose that market interest rates were 6% semiannually on January 1, 20X4, or 12.36% annually. [This 12.36% annual rate of interest is equal to the 6% semiannual rate, compounded: 0.1236 = (1.06 × 1.06) − 1.00.] What is the bond’s market price on that date? Is the company better or worse off because of the interest rate change? Explain.

Transcribed Image Text:

Semiannual Payment Interest Premium Net Date Expense Amortization Liability 7/1/20X1 12/31/20X1 6/30/20X2 12/31/20X2 6/30/20X3 12/31/20X3 6/30/20X4 12/31/20X4 6/30/20X5 12/31/20X5 6/30/20X6 $21,622 21,487 $25,000 25,000 $540,554 537,176 533,663 $(3,378) (3,513) (3,653) (3,800) (3,952) (4,110) (4,274) (4,445) (4,623) (4,806) 21,347 21,200 25,000 530,010 526,210 522,258 518,148 25,000 21,048 25,000 20,890 25,000 20,726 20,555 25,000 513,874 25,000 509,429 504,806 500,000 20,377 25,000 20,194 25,000