Question

Enviro Company issues 8%, 10-year bonds with a par value of $350,000 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. 1. Using the implied selling price of 87 ½, what are the issuer's cash proceeds from issuance of these bonds? 2. What total amount of bond interest expense will be recognized over the life of these bonds? 3. What is the amount of bond interest expense recorded on the first interest payment date?

Answer 1

Answer:

1) Cash proceeds is $306,250

2) Total bond interest expense over life of bonds is $329,750

3) The amount of bond interest expense recorded on the first interest payment date is $16,187.50

Explanation:

1) Cash proceeds = $350,000 × 87.50% = $306,250

2) Total bond interest expense over life of bonds:  

Amount repaid:  

20 payments of $14,300                       $286,000  

Par value at maturity                               $350,000  

Total repayments                                       $636,000  

Less amount borrowed                               $306,250  

Total bond interest expense               $329,750  

3) Semi-annual interest payment = $350,000 × 8%/2 = $ 14,000

Add: Discount amortization = ($350,000 - $306,250 ) ÷ 20  = $2,187.50

Bond interest expense = $2,187.50 + $14,000 = $16,187.50