Question

Enviro Company issues 8%, 10-year bonds with a par value of $170,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10 % , which implies a selling price of 87 12. 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? Cash proceeds 2. What total amount of bond interest expense will be recognized over the life of these bonds? Total Bond Interest Expense Over Life of Bonds: Amount repaid 20 payments of Par value at matunity 170.000 170 000 Total repayments Less amount borrouved (from part 1) Total bond interest expense 170.000

Answer 1

Face value of the Bond Less: Bond Selling price Dicount on bonds Payable 170000 148750 21250 Cash Proceeds ( 170000*0.8750) 148750 Total Bond interest Expenses over the life of the bond Amount Repaid : 20 Payment of $6800 136000 Par value at Marturiy 170000 Total Repaymnet 306000 Less amount borrowed 148750 Total bond interest Expenses 157250 Bond interest Expenes for First Payment 7863(OR) 6800+(21250/20) 7862.50