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2 pages/≈550 words
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Management
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Case Study
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English (U.S.)
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# Lyons Document Storage Corporation Bond Accounting (Case Study Sample)

Instructions:

In late December 2008 Rene Cook sat in her cubicle trying to remember what she had learned in business school about bonds and bond accounting. Ms. Cook, a new MBA and special assistant in a training assignment with the company president, had just met with David Lyons, president of Lyons Document Storage Corporation. He had asked her to think about the possible consequences of repurchasing company bonds outstanding using cash that he felt could be obtained by issuing new bonds with a lower interest rate. Mr. Lyons had asked Rene to focus on how much the company’s annual interest payments could be reduced, how reported earnings would be affected, and how the refunding would change the company’s financial position as referenced on the balance sheet, if at all.

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Content:

Lyons Document Storage Corporation Bond Accounting
Name
Course
Date
1.Lyons Document Storage’s controller, Eric Petro, told Rene that the bonds were issued
in 2000 at a discount and that only approximately \$9.0 million was received in cash.
Explain what is meant by the terms “premium” or “discount” as they relate to bonds.
Compute exactly how much the company received from its 8% bonds if the rate
prevailing at the time of the original issue was 9% as indicated in Exhibit 2. Also re-
compute the amounts shown in the balance sheet as December 21, 2007 and December
31, 2008, for Long-Term Debt. What is the current market value of the bonds
outstanding at the current effective interest rate of 6%?
A bond is considered to be a premium bond when its price is higher than the face value as coupon rate is greater than the required return on the bond and investors want higher yields
Discount Bonds
A bond is considered to be a discount bond when its price is lower than its face value. Bonds that pay interest half-yearly (semi-annually) and at the coupon interest rate, and have an initial maturity determined (Brigham & Ehrhardt, 2017).
Computation of how much the company received from its 8% bonds at 9% yield
Lyons Document Storage Corporation Bond Accounting
Coupon Rate: 8% paid semiannually
Market Yield: 9 %--> 4.5 Semiannually
Bond Issue: 10,000,000
No of semiannual periods: 40 (20*2)
Calculations
PV of Principal(1000/ (1.045) ^40) = 171.9287011
PV of Interest = (1,000*0.04)* (1-1/ (1.045)^40)/0.045(=40* 18.40158442 =736.0633768
Total proceeds at the time of issuance/ current market value
P.V. of Principal + P.V of Interest=907.9920779
But there are 10,000 so this is 10,000*907.9920779 = \$9,079,920.78
Total Discount Amortized = Bond Value – Proceeds(10,000,000- 9,079,920.78=\$920,079.22
Computation of how much the company received from its 8% bonds at 6% yield
Coupon Rate: 8% paid semiannually
Market Yield: 6 %--> 3% Semiannually
Bond Issue: 10,000,000
No of semiannual periods: 24 (12*2)
PV of Principal(1000/ (1.03) ^24) = 491.9337363
P.V of Interest = (1,000*0.04)* (1-1/ (1.03)^24/0.03(=40* 23.11477197=677.4216849
Total proceeds at the time of issuance / current market value
P.V. of Principal + P.V of Interest=1169.355421
But there are 10,000 payable so thi

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