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Bond Accounting Case Study: Lyons Corp

Bonds are long-term debt instruments that are issued by entities to raise capital. They involve loans made by investors to issuers. Premium bonds offer interest rates higher than current market rates, making them less risky. Discount bonds are issued at prices lower than their par value, appealing to investors seeking lower prices. The case study examines accounting for bonds issued by Lyons Document Storage Corporation. It computes the amount received from 8% bonds issued at a time when the market rate was 9%. It also recomputes long-term debt amounts on the balance sheet in 2006 and 2007. Finally, it calculates the current market value of the outstanding bonds given a new effective interest rate of 6%.

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Ana Tungia
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83 views2 pages

Bond Accounting Case Study: Lyons Corp

Bonds are long-term debt instruments that are issued by entities to raise capital. They involve loans made by investors to issuers. Premium bonds offer interest rates higher than current market rates, making them less risky. Discount bonds are issued at prices lower than their par value, appealing to investors seeking lower prices. The case study examines accounting for bonds issued by Lyons Document Storage Corporation. It computes the amount received from 8% bonds issued at a time when the market rate was 9%. It also recomputes long-term debt amounts on the balance sheet in 2006 and 2007. Finally, it calculates the current market value of the outstanding bonds given a new effective interest rate of 6%.

Uploaded by

Ana Tungia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Case Study - Lyons Document Storage Corporation: Bond Accounting

Presented By: Sopiko Gergaia, Anna Tungia

bonds are long-term debt instruments issued by governments, corporations, or municipalities to


raise capital. They are loans made by investors to the issuer, who promises to repay the principal amount
at maturity, along with annual interest payments.
Let's briefly review the terms premium and discount in relation to bonds to better understand what they
mean and how they differ from one another.
Bonds are at a premium when the coupon or interest rate offered is higher than the interest rate
that’s being offered for new bonds, simply put at market rate, whereas A bond that is issued, or trades in
the market for less than its par or face value. is known as a discount bond. With premium bonds, you’re
getting the benefit of potentially earning a higher interest rate than the overall market. These bonds tend
to have a lesser chance of default as they’re frequently issued by government or reliable companies with
strong credit ratings. Discount bonds, on the other hand, are incredibly appealing to investors looking to
buy bonds for a lower price.

● Compute exactly how much the company received from its 8% bonds (bond A)
if the rate prevailing at the time of the original issue was 9%.

Interest rate- 8% / semiannually 4%


Maturity- 20yr / semiannually 40 period
Principle- 10 000 000
Market rate- 9% / semiannually 4.5%
Annual payment- 400 000 (4% of 10 000 000)

principal= 10 000 000* 0.1719 (PVIF of 4.5% / 40 period) = 1 719 000


annual= 400 000* 18,4 (PVIFA of 4.5% / 40 period) = 7 360 000
Present value of bonds = 1 719 000 + 7 360 000 = 9 079 000
● Re-compute the amounts shown in the balance sheet at December 31, 2006, and December
31, 2007, for Long-Term Debt.

From Dec 31, 2006 before maturity is left 12.5 year/ 25 period as it’s paid semiannually
From Dec 31, 2007 before maturity is left 11.5 year/ 23 period as it’s paid semiannually

For 2006:
principal= 10 000 000* 0.3327 (PVIF of 4.5% / 25 period) = 3 327 000
annual= 400 000* 14,828 (PVIFA of 4.5% / 25 period) = 5 931 200
Recomputing the amount shown at Dec 31, 2006: 3 327 000 + 5 931 200 = 9 258 200

For 2007:
principal= 10 000 000* 0.3634 (PVIF of 4.5% / 23 period) = 3 634 000
annual= 400 000* 14,148 (PVIFA of 4.5% / 23 period) = 5 659 2000
Recomputing the amount shown at Dec 31, 2007: 3 634 000 + 5 659 2000 = 9 292 200

● What is the current market value (December 2008) of the bonds outstanding at the current
effective interest rate of 6% (Bond A)?

Currently, before maturity is left 10.5 year/ 21 period as it’s paid semiannually
Interest rate- 6%

Current market value:


principal= 10 000 000* 0.5375 (PVIF of 3% / 21 period) = 5 375 000
annual= 400 000* 15,416 (PVIFA of 3% / 21 period) = 6 166 000
Present market value of bonds = 5 375 000 + 6 166 000 = 11 541 000

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