Alternative 3 the town would issue 32071355 in 20-year zero

Assignment Help Accounting Basics

Reference no: EM13598937

Accounting practices for interest expenditures may neither reflect actual economic cost nor mirror those for interest revenues.
A town plans to borrow about $10 million and is considering three alternatives. A town official request your guidance on the economic cost of each of the arrangements, and your opinion as to how they affect the town's reported expenditures:

Alternative 1: The town would issue $10 million of 20-year, 6% coupon bonds on September 1, 2013. The bonds would be issued at par. A town would be required to make it first interest payment of $300,000 on January 1, 2014.

Alternative 2: The town would issue $10 million of 20-year, 6% bonds on July 1, 2013. The bonds would be sold for $9,552,293, a price that reflects an annual yield (effective interest rate) of 6.4%. The town would be required to make its first interest payment of $300,000 on December 31, 2013.

Alternative 3: The town would issue $32,071,355 in 20-year zero coupon bonds on July 1, 2013. The bonds would be sold for $10 million, an amount that reflects an annual yield of 6%. The bonds require no payment of principal or interest until June 30, 2032.

3. Suppose that the town borrowed $10 million on September 1, 2013, and temporarily invested the proceeds in two-year, 6% Treasury notes. The first payment of interest, $300,000 is payable on January 1, 2014.

a. What would be the town's economic gain from investing the funds in the year ending December 31, 2013? Ignore borrowing cost.
b. How much investment revenue should the town report for the year ending December 31, 2013. Assume there was no change in prevailing interest rates.

Reference no: EM13598937

Questions Cloud

If equivalent units are 9000 for conversion costs and : if equivalent units are 9000 for conversion costs and units transferred out equals 6000 what stage of completion should

How would you make sure a payment is actually for what it : how would you make sure a payment is actually for what it was stated for?how would you make sure the payment is

Prepare journal entries to reflex how the transaction and : some transactions are reported differently in funds versus government-wide statements but other are not. the state

A company with 800000 in operating assets is considering : a company with 800000 in operating assets is considering the purchase of a machine that costs 75000 and which is

Alternative 3 the town would issue 32071355 in 20-year zero : accounting practices for interest expenditures may neither reflect actual economic cost nor mirror those for interest

The whitton company uses a discount rate of 16 the company : the whitton company uses a discount rate of 16. the company has an opportunity to buy a machine now for 18000 that will

Suppose that the town elects the first option and issues 10 : accounting practices for interest expenditures may neither reflect actual economic cost nor mirror those for interest

Frantic company had 130000 in sales on account last year : frantic company had 130000 in sales on account last year. the beginning accounts receivable balance was 10000 and the

Eral company has 17000 in cash 3000 in marketable : eral company has 17000 in cash 3000 in marketable securities 36000 in current receivables 24000 in inventories and

User Account

All Pages