Prepare a bond amortization schedule

The promotions manager of Waterbed World is interested in running a “36 months, no interest sale.” He wants to offer customers the opportunity to buy waterbeds and to finance the purchase by merely dividing the price of the waterbed by 36 to determine the customer’s monthly payment. However, he realizes that the sale price must somehow include the 12 percent interest usually charged to finance credit purchases. He has asked you to show him how to determine the sale price of a waterbed that normally sells for $1,000.

Tuell plans to issue $2 million of 10 percent, 20-year bonds. The market rate of interest at the time of issue is 9 percent. The bonds are issued on June 30, 2010, and pay interest semiannually on June 30 and December 31. Tuell has a December 31 year-end.

Required:

Use a computer spreadsheet.

A. Determine the amount of cash Tuell will receive when the company issues the bonds.

B. Prepare a bond amortization schedule that indicates the amounts of cash, interest expense, amortization, and bond carrying value on each interest payment date.

Solution: