Nilani Company purchased 100 Arapaho Company on April 1, 2007. The bonds pay interest semiannually on March

Question:

Nilani Company purchased 100 Arapaho Company on April 1, 2007. The bonds pay interest semiannually on March 31 and September 30 at an annual coupon rate of 9%. The bonds sold at an effective yield of 8%. The effect of brokerage fees is included in computing the effective yield. The bonds mature on March 31, 2009, at their face value of $ 1,000 per bond. Nilani’s fiscal year ends on September 30.

Required:

a) Compute the price Nilani paid for Arapaho’s bonds.

b) Prepare an amortization schedule for Nilani’s investment.

c) Assume that the bonds are classified as held to maturity securities. Use the format presented in this chapter to show how the bond transactions would be entered into Nilani’s accounting system in 2007, 2008, and 2009.

d) What is the total interest revenue from these bonds that Nilani will report on its 2007, 2008, and 2009 income statements? How does total interest revenue compare to Nilani’s net cash flow from this bond investment during those same three years? Show your computations.

e) What does the result in part D suggests to you regarding the similarities and differences between accrual and cash based measures.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...