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Liabilities for Outdoor Adventure Camps

In order to fund the outdoor adventure camps, Sam and George have determined they need $1,000,000. They have found a bank willing to loan them the $1,000,000 at an interest rate of 10% for 20 years. The business would be required to make monthly payments on this loan. Another option for the company is to incorporate the business and to sell bonds. The bonds would be 30-year, $1,000 bonds paying 6% interest semi-annually.

In your post, explain how each of these long-term liabilities would be recorded. Assume the going rate for investments is 4%. How many bonds would have to be sold? How would the interest payments be reported for both options? What if the going rate for investments were 8%, how many bonds would need to be sold then? Would this change the way the bonds are recorded? If so, how? What if the going rate for investments were 4%, how many bonds would need to be sold then? Would this change the way the bonds are recorded? If so, how?

Solution Preview

Bank Loan
Debit: Cash 1,000,000
Credit: Loans Payable 1,000,000
Bonds
Coupon 6%
Coupon 60
PVOA, 4%, 60 22.6235
NPV $1, 4%, 60 0.0950
Proceeds for bonds: 1,000*0.0950 + 60*22.6235=1,452.41
NPV of a 1,000 bond is 1,452.41, hence the company needs ...

Solution Summary

The solution examines liabilities for outdoor adventure camps. How each of the long-term liabilities would be recorded is determined.

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