On October 1, 2017 Marigold Corp. issued 5%, 10-year bonds with a face value of $7920000...
On October 1, 2017 Marigold Corp. issued 5%, 10-year bonds with a face value of $7920000 at 103. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2017 income statement of Marigold Corp. would be
Homework Answers
Solution
| Interest expense on December 31 | $ 93,060.00 |
Working
| Bond issue price (7920000/100*103) | $ 8,157,600 |
| Face value | $ 7,920,000 |
| Premium on bonds payable | $ 237,600 |
| Number of Interest payments (10 years x 2) | 20 |
| Discount/ premium to be amortized per Half year | $ 11,880 |
| Cash Interest on bond (7920000 x 2.5%) | $ 198,000 |
| Interest expense to be recorded semiannual (198000-11880) | $ 186,120 |
| Interest expense for 3 months (186120/2) | $ 93,060 |
SOLUTION :
Face value of the bond = 7920000
Premium amount = 7920000 * (103 - 100)/100 = 237600
Maturity period of the bond = 10 years.
Coupon rate is 5%, paid semi-annually
Hence, coupon amount per period of payments
= Interest expense on the bond per period
= 7920000 * 0.05/2
= 198000
Premium of 2376000 is to be amortised for 20 semi-annual periods
As per straight line method amortisation per period
= 2376000 / 20
= 118800
So, total expense (considered as effective interest) per period
= Coupon amount - amortised premium
= 198000 - 118800
= 79200.
Bond issued on October 1, 2018, so effective interest for 3 months is applicable in the year ending on Dec. 31, 2017.
Hence, effective interest expense in 2017 :
= 1/2 * interest per semi-annual period
= 1/2 * 79200
= 39600 (ANSWER)
SOLUTION : CORRECT ANSWER :
Face value of the bond = 7920000
Premium amount = 7920000 * (103 - 100)/100 = 237600
Maturity period of the bond = 10 years.
Coupon rate is 5%, paid semi-annually
Hence, coupon amount per period of payments
= Interest expense on the bond per period
= 7920000 * 0.05/2
= 198000
Premium of 237600 is to be amortised for 20 semi-annual periods
As per straight line method amortisation per period
= 237600 / 20
= 11880
So, total expense (considered as effective interest) per period
= Coupon amount - amortised premium
= 198000 - 11880
= 186120
Bond issued on October 1, 2018, so effective interest for 3 months is applicable in the year ending on Dec. 31, 2017.
Hence, effective interest expense in 2017 :
= 1/2 * interest per semi-annual period
= 1/2 * 186120
= 93060 (ANSWER)
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