Question

Enviro Company issues 8%, 10-year bonds with a par value of $240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 1/2. The straight-line method is used to allocate interest expense.

Answer 1

Answer:

1.  Cash proceed $210,000

2. Total Interest Expense $222,000

3. First year interest Expense $22,200

Explanation:

The bond is issued on discount and this discount will be expensed over the bond period until maturity.

As Selling price is the $87.5, So the cash proceed will be

1.

Cash Proceed = $240,000 x $87.50/ $100 = $210,000

2.

Discount Amount = $240,000 - $210,000 = $30,000

Total Interest on the bond = $240,000 x 8% x 10 = $192,000

Total Interest expense = $192,000 + $30,000 = $222,000

3.

Interest first year = $222,000 / 10 = $22,200