Taxation

Assignment 12-15

Requirement 1

The effective interest rate is the internal rate of return which equates the future cash flows to the price of $485,635. The future cash flows are interest of $37,500 per year for eight years and the payment at maturity of $500,000. The equation would be as follows:

$485,635 = $500,000 (P/F, i, 8) + $37,500 (P/A, i, 8)

An interest rate of 8% satisfies the equation:

P = $500,000 (.54027) + $37,500 (5.74664) = $485,635

Requirement 2

Price of bond:

P $500,000 (P/F, 6%, 8) = $500,000 (.62741) $313,705

I $37,500 (P/A, 6%, 8) = $37,500 (6.20979) 232,867

$546,572

Requirement 3

Effective Interest

Balance, interest payment Discount Balance,

Period beginning @8% @7.5% Amortization ending

20x1 $485,635 $38,851 $37,500 $ 1,351 $ 486,986

20x2 486,986 38,959 37,500 1,459 488,445

20x3 488,445 39,076 37,500 1,576 490,021

20x4 490,021 39,202 37,500 1,702 491,723

20x5 491,723 39,338 37,500 1,838 493,561

20x6 493,561 39,485 37,500 1,985 495,546

20x7 495,546 39,644 37,500 2,144 497,690

20x8 497,690 39,810(1) 37,500 2,310 500,000

(1) rounded down by 5

Requirement 4

Proceeds of bond = $485,635 + (2/12 of $1,351) = $485,860

Accrued interest = $500,000 x 7.5% x 2/12 = 6,250

$492,110

Requirement 5

Interest expense ($38,851 per table x 10/12 ) $32,376

Net bonds payable (per table) $486,986

Assignment 12-26

Requirement 1

1 July 20x1

Cash1 688,417

Discount on bonds payable 111,583

  Bonds payable 800,000

1 $800,000 (P/F, 6%, 19) (.33051) + $38,000 (P/A, 6%, 19) (11.15812)

31 December 20x1

Interest expense*...