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Calculate the cost of borrowing of the bond

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In early 2020, 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 inflation the rate of Interest Rate was having declining tendency. Finally he had taken decision to issue Long Term Bonds for Debt Financing. On January 01, 2020 Company sold a Bond having value Rs.100 Million for 6 years' time maturity on semiannual basis. The Coupon Rate was 10% on 01-01-2020. In the open Market, Rate of Interest was 08%. Company received Rs. 109,385,073 against issuance of Bonds.

You are required to calculate the following:

Question a. Bond Amortization Schedule by adapting Effective Interest Method.

Question b. First year Journal entries both for Interest Expense and Bond Amortization

Question c. Cost of Borrowing of the Bond

Question d. Why Mr. John is keen to look into the market rate before issuing the Company's Bond in open market. Why he has taken decision to issue Bonds for Debt Financing?

Question e. Company had the option to amortize the Bond through "Straight Line method" but they adapted "Effective Interest Rate Method", why??

Reference no: EM132508692

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