Subjective exam Essay Example for Free

Subjective exam EssayA) Selling price of adhereThe determination of the selling price of bonds is important because it helps the bondholders know the picture they will receive if they were to purchase the bond. lodges can be issued at score, premium and at a discount. A Bond is said to be issued at par if the yield is equal to the coupon account. If the current market yield is more than the coupon rate stated on the bond, then, that bond has been issued at premium. If the coupon rate is more than the yield rate currently earned by similar bonds in the market (Sheth, 2007, Slide 23, chapter 12).Bondholders receive periodic remunerations of engross amount, which is constant oer the life of bond. Therefore the price of the bond is arrived at by discounting all these payments i.e. the selling price is the defend think of of all periodic payments plus the present value of the maturity amount, which is the principle amount of the bond. (Englard, 1992, Page 6, chapter 1).The fo rmula for calculating the price of the bond is as shown below.Bond price= (PV) =p (1+r)-2 + p (1+r)-2 +. +p (1+r)-n + m (1+R)-nWhere =p= period receipt/paymentr=required yield effectiveM=maturity value (principle amount)The periodic receipts of please amount are constant over the bond period and therefore are annuity in nature.Therefore to calculate the present value of the affair payments the annuity formula is used.Present value interest payments= Constant interest receipts* (1-(1 +r) nThe maturity amount (principle) is received as a ace amount at the end of the bond period, thus is a single amount discounted using the single amount formula.Present value maturity value =m (1+r)-1Therefore, the total selling price is the sum of present value of interest and principal amount.2) Presentation of bonds in balance sheetWhen a bond is issued, the following factors are considered in accounting for the bonds. Recording the issue or purchase of the bond Recording the interest received du ring the life of the bond.-Accounting for the retirement (through calling, refinancing or conversion) of the bond. (Sheth, 2007, Slide 16, Chapter 12)Issuers booksAs seen earlier bonds can be issued at par, discount or premium.Bond issued at par- the bonds were issued between interest dates.semipermanent liabilities.Bond payable xxxCurrent liabilityInterest payable (1 month) xxxCurrent assetsCash (amount of bond) xxxBond issued at a discount long liabilitiesBonds payable xxxDiscount on bonds payable xxxCurrent assetsCash (less discount on bond) xxxBonds issued at a premiumLong-term liabilitiesBonds payable (plus premium) xxxCurrent assetsCash (including premium) xxxInvestors booksThe buyers balance sheet will be as followsAt parAssetsInvestments in bond xxxCurrent-assetInterest accrued (1 month) xxxCash (amount of bond) xxxAt discountAssetsInvestment in bond (less discount) xxxCurrent assetsCash xxxAt premiumAssetsBond investment (plus premium) xxxCurrent assetsCash (plus premiu m) xxxB) Income statement itemsThe items that will be allowd in the income statement of Norris co. for the year 2008 include-Interest expenses-Adjustment to interest expenses (amortization)Interest expensesThe amount of interest is determined using the par value and the coupon rate and not effective rate. (Englard, 1992, page 2-3)IllustrationAt parUsing the example of Norris co. bond assuming that it was issued at par, then the interest will be 1000*xx%= interest.At discountPayment- interest = xx%*1000Interest amount = yy% *(1000-discount)The difference between the interest payment and interest amount is amortization of discount.At premiumInterest payment =xx% * 1000Interest amount= yy% * (1000 +premium)The difference between the interest payment and the interest amount is the amortization of premium.