On July 1, 2015, ABC Co. issued 10-year, $4,574 million maturity value, 3% coupon bonds when the market rate was 2% for a cash price of $4,994 million. Interest was payable semi-annually on Dec. 31 and June 30. ABC also issued $3,527 million face value, 20-year, zero coupon bonds on July 1, 2017 that mature June 30, 2037 for a cash price of $2,619 million. The effective market interest rate at issuance was 1.5%. ABC repurchased $1,143 million face value coupon bonds on June 30, 2020 for $1,220 million cash (after interest was paid) and $582 million in face value of the zero- coupon bonds on June 30, 2021 for a purchase price of $432 million cash.

Review what you have learned about coupon bonds as well as the explanation of zero-coupon bonds on p. 537 of your text, and answer the following questions, expressing all numbers in millions (for example, the face amounts of the bonds are $4,574 and $3,527, respectively). Please answer in complete sentences and show your calculations for numerical answers and journal entries. Please do not use decimals in any of your answers (Round to millions).

1. Show the calculations for how the cash prices were determined for both bond issuances and make the journal entries for each at issuance using discount or premium accounts if applicable. (Do not net in Bond Payable)
2. Prepare amortization schedules for both bond issuances. Note interest is semi- annual for the coupon bonds and you may assume annual for the zero- coupon bonds. Use the effective interest method.
3. What amount of interest expense for the bonds did ABC report on its income statement in 2019 for each bond separately and in total?
4. Interest expense is deductible on the corporate tax return. Assuming a corporate tax rate of 19% in 2019, how much did ABC save in taxes by deducting the interest expense? What was the after-tax interest cost in 2019?
5. At the end of June 30, 2020, what was the book value of the coupon bonds before the repurchase transaction? At the end of June 30, 2021, what was the book value of the zero-coupon bond before the repurchase transaction? Name the two accounts and balances from the Balance Sheet that combine to determine the book value for each bond.

Answer rating: 100% (QA)

Zero coupon bonds In million Face value 3527 Book value 2619 1 Journal Entry of Zero coupon Bond Issue Date Particulars Debit in million Credit in mil... View the full answer