Question

Most Solutions, Inc., issued 13% bonds, dated January 1, with a face amount of $540 million on January 1, 2021. The bonds mature in 2031 (10 years). For bonds of similar risk and maturity, the market yield is 15%. Interest expense is recorded at the effective interest rate. Interest is paid semiannually on June 30 and December 31.

Most recorded the sale as follows:

January 1, 2021
Cash (price) 484,947,999
Discount on bonds (difference) 55,052,001
Bonds payable (face amount) 540,000,000

Required:
1. What would be the net amount of the liability Most would report in its balance sheet at December 31, 2021?
2. What would be the amount related to the bonds that Most would report in its income statement for the year ended December 31, 2021?
3. What would be the amount(s) related to the bonds that Most would report in its statement of cash flows for the year ended December 31, 2021?

Answer 1

Net amount of liability is $487,585,531.34

Income statement expense is $72,837,532.35

Cash flow amount is $70,200,000

Step-by-step explanation:

The amount the company,Most Solutions Inc, would record in its balance sheet as at 31st December,2021 is the initial cash proceeds of $484,947,999 plus the 2 interest expenses for the year minus the 2 coupon payments in the year as shown in the schedule below:

Bal B/f Interest expense coupon payment Bal c/f

30-6 $484,947,999 $36,371,099.93 $ 35,100,000.00 $486,219,098.93

31-12 486,219,098.93 $36,466,432.42 $35,100,000 $487,585,531.34

The first interest expense=15%/2*$484,947,999=$36,371,099.93

coupon payment=$540,000,000*13%/2= $35,100,000

second interest expense= $486,219,098.93 *15%/2=$36,466,432.42

The bal c/f =opening balance+interest expense-coupon payment

total interest expense for the year=$36,371,099.93+$36,466,432.42=$ 72,837,532.35

total cash outflow=$35,100,000=$70,200,000