Nilani Company purchased 100 Arapaho Company bonds on April 1,2007. The bonds pay interest semiannually on March 31 and September30 at an annual coupon rate of 9%. The bonds sold at an effectiveyield of 8%. The effect of brokerage fees is included in computingthe effective yield. The bonds mature on March 31, 2009, at theirface value of $ 1,000 per bond. Nilanis fiscal year ends onSeptember 30.
A. Compute the price Nilani paid forArapahos bonds. (Hint: Determine the present value of the interestpayments and principal repayment as demonstrated in Chapter 8.)
B. Prepare an amortization schedule forNilanis investment.
C. Assume that the bonds are classifiedas held- to- maturity securities. Use the format presented in thischapter to show how the bond transactions would be entered intoNilanis accounting system in 2007, 2008, and 2009.
D. What is the total interest revenuefrom these bonds that Nilani will report on its 2007, 2008, and2009 income statements? How does total interest revenue compare toNilanis net cash flow from this bond investment during those samethree years? Show your computations.
E. What does the result in part Dsuggests to you regarding the similarities and differences betweenaccrual and cash- based measures?