Nilani Company purchased 100 Arapaho Company bonds on April 1,2007. The bonds pay interest semiannually on March 31 and September 30 at an annualcoupon rate of 9%. The bonds sold at an effective yield of 8%. The effect of brokeragefees is included in computing the effective yield. The bonds mature on March 31, 2009, at theirface value of $1,000 per bond. Nilani's fiscal year ends on September 30.
Required
A. Compute the price Nilani paid for Arapaho's bonds.(Hint: Determine the present value of the interest payments and principal repayment as demonstratedin Chapter 8.)
B. Prepare an amortization schedule for Nilani'sinvestment.
C. Assume that the bonds are classified as held-to-maturitysecurities. Use the format presented in this chapter to show how the bond transactions would beentered into Nilani's accounting system in 2007, 2008, and 2009.
D. What is the total interest revenue from these bonds thatNilani will report on its 2007, 2008, and 2009 income statements? How does total interest revenuecompare to Nilani's net cash flow from this bond investment during those same three years?Show your computations.
E. What does the result in part D suggest to you regarding thesimilarities and differences between accrual and cash-based measures?