On January 1, 2004, $100,000,000 in 7.5%, 10-year callable bonds were issued at 96.64% to yield an effective rate of 8.0%. Callable at 103; interest paid annually on January1.
If the bonds are called on April 1, 2006, what are the needed payments and entries to extinguish the bonds? Assume that no entries have been made since the January 1, 2006 interest payment.
Miles Metals recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges, it had $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. What was the firm's net income after taxes?
To determine the needed payments and entries to extinguish the bonds, we need to understand the details of the bonds and calculate the relevant figures.
Given information:
- Bonds: $100,000,000 in 7.5%, 10-year callable bonds
- Issued at: 96.64% of face value
- Callable at: 103% of face value
- Effective yield: 8%
- Interest payment frequency: Annually on January 1st
- Bonds are called on April 1st, 2006
- No entries have been made since the January 1st, 2006 interest payment
Here's how we can calculate the needed payments and entries:
1. Calculate the face value of each bond:
Face value = $100,000,000
2. Calculate the price at which the bonds were issued:
Issued price = 96.64% of face value
Issued price = 0.9664 * $100,000,000 = $96,640,000
3. Determine the call price:
Call price = 103% of face value
Call price = 1.03 * $100,000,000 = $103,000,000
4. Calculate the outstanding principal as of April 1, 2006:
Outstanding principal = Face value - (Principal repaid each year for 2 years)
Since the bonds were called on April 1, 2006 (before expiration), we only need to calculate for 2 years.
Year 1 principal repayment = Interest paid on January 1, 2005 = Face value * Interest rate = $100,000,000 * 7.5% = $7,500,000
Year 2 principal repayment = Interest paid on January 1, 2006 = Face value * Interest rate = $100,000,000 * 7.5% = $7,500,000
Outstanding principal = $100,000,000 - $7,500,000 - $7,500,000 = $85,000,000
5. Calculate the premium or discount amortization per year:
Premium or discount amortization = (Face value - Issued price) / Number of years
Premium or discount amortization = ($100,000,000 - $96,640,000) / 10 = $3,360,000 per year
6. Calculate the carrying value as of April 1, 2006:
Carrying value = Issued price + (Premium or discount amortization per year * Number of years)
Carrying value = $96,640,000 + ($3,360,000 * 2) = $103,360,000
7. Determine the total payment required for bond extinguishment:
Total payment = Call price + Unpaid interest + Carrying value - Outstanding principal
Since no entries have been made since the January 1, 2006 interest payment, unpaid interest will be calculated up to that date.
Unpaid interest = Outstanding principal * Interest rate
Unpaid interest = $85,000,000 * 7.5% = $6,375,000
Total payment = $103,000,000 + $6,375,000 + $103,360,000 - $85,000,000 = $127,735,000
Therefore, the needed payment to extinguish the bonds on April 1, 2006, would be $127,735,000. This amount includes the call price, unpaid interest, carrying value, and the outstanding principal.