Question

Bonds payable—various issues On July 1, 2013, $6 million face amount of 7%, 10-year bonds were issued. The bonds pay interest on an annual basis on June 30 each year. The market interest rates were slightly higher than 7% when the bonds were sold.
Required:
a. How much interest will be paid annually on these bonds?
b. Were the bonds issued at a premium or discount? Explain.
c. Will the annual interest expense on these bonds be more than, equal to, or less than the amount of interest paid each year? Explain your answer.

Answer 1

Answer:

(A) 420,000 cash disbursements

(B) discount.

(C) It will be more than the cash disbursements

Explanation:

6,000,000 x 0.07 = 420,000 cash disbursements

(B) the bonds were issued at discount, because the market rate was higher than 7% so the price fall below face value to match the market price.

(C) It will be more than the cash disbursements. There is adiference between face value and cash proceed from the issuance of the bonds, this diference is amortize each period increasing the interest expense of the bond.