Reference no: EM132498365

Merle Company is seeking to borrow some money on a long-term basis. This firm is considering pursuing one of two alternatives: (1) issuing twenty bonds with a face amount of $1,000 each or (2) signing a long-term note payable for $17,000. Assume that both alternatives would provide cash to Merle on December 31, Year 1.

The terms of the two alternatives are presented below:

1. The bonds would have a coupon rate of 8% and a market rate [effective rate] of 10%. The bonds would pay interest semiannually on June 30 and Dec. 31 and would have a maturity date on Dec. 31, Year 12.
2. The note payable would have an interest rate of 8% and would be paid off over 5 years with equal quarterly installments starting three months after Dec. 31, Year 1. These payments would fully amortize the note's principal and interest. Amortize means 'pay off.' This is a long-term Note Payable as it extends for longer than one year.

If using the PV/FV tables, do not round the factors from the way they are shown in the tables. Present your answers in whole dollar amounts only, without 'signs and without commas.

Question 1: How much cash would issuing the bonds on Dec. 31, Year 1, provide to Merle on that date? This is the issue price.

Question 2: How much Interest Expense would the firm recognize in Year 2 if it issued the Bonds Payable? Year 2 ends on Dec. 31, Year 2.

Question 3: How much Interest Expense would the firm recognize in Year 2 if it borrows using the Note Payable? Year 2 ends on Dec. 31, Year 2.

Question 4: How much cash will Merle have to pay out in Year 3 if issuing the Bonds Payable?

Question 5: How much cash will Merle have to pay out in Year 3 if issuing the long-term Note Payable?

Question 6: What would the carrying value of the Note Payable be on Dec. 31, Year 5, after making the sixteenth loan payment on that date?

Question 7: What would the carrying value of the Bonds Payable be on Dec. 31, Year 5, after making the interest payment on that date