Reference no: EM132512101
In early 2015, Mr. John was the Director Finance of M/s Ericson Public Limited. He was planning for Debt financing for the company for two purposes, one to release some of previous Bank Financing and second for the purchase of one existing unit from other company. Due to the country's economy situation the Interest Rate was having increasing tendency but the company's situation forced him for the Bond issuance. Finally he had taken decision to issue Long Term Bonds for Debt Financing. On January 01, 2015 Company sold a Bond having value Rs.10 Million for 6 years' time maturity on semiannual basis. The Coupon Rate was 10% on 01-01-2015. In the open Market, Rate of Interest was 12%. Company received Rs. 9,161,616, against issuance of Bonds.
You are required to calculate the following:
Question a. Bond Amortization Schedule by adapting Effective Interest Method.
Question b. Journal entries for issuance of Bonds and payments to the Bond holder at the time of Maturity.
Question c. Cost of Borrowing of the Bond
Question d. Why Mr. John was keen to look into the market rate before issuing the Company's Bond in open market. Why he had taken decision to issue Bonds for Financing?
Question e. Company had the option to amortize the Bond through "Straight Line method" but they adapted "Effective Interest Rate Method", why??
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