Question

ions Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest ments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 873. The straight-line method is used to allocate interest expense. 1. 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.

Par Value of Bonds = $250,000

Issue Value of Bonds = 87.50% * $250,000
Issue Value of Bonds = $218,750

Answer 2.

Discount on Bonds Payable = Par Value of Bonds - Issue Value of Bonds
Discount on Bonds Payable = $250,000 - $218,750
Discount on Bonds Payable = $31,250

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $250,000
Semiannual Coupon = $10,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds Payable / Semiannual Period
Semiannual Amortization of Discount = $31,250 / 20
Semiannual Amortization of Discount = $1,562.50

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $10,000 + $1,562.50
Semiannual Interest Expense = $11,562.50

Total Interest Expense = Semiannual Interest Expense * Semiannual Period
Total Interest Expense = $11,562.50 * 20
Total Interest Expense = $231,250

Answer 3.

Interest expense recorded on the first interest payment date is $11,562.50 or $11,563