Question

Legacy issues $710,000 of 8.0%, four year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $621,812 and their market rate is 12% at the issue date. 2. Determine the total bond interest expense to be recognized over the bonds' life. Total bond interest expense over life of bonds: Amount repaid payments of Par value at maturity Total repaid Less amount borrowed Total bond interest expense

Answer 1

Face Value = $710,000
Issue Value = $621,812

Discount on Bonds Payable = Face Value - Issue Value
Discount on Bonds Payable = $710,000 - $621,812
Discount on Bonds Payable = $88,188

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $710,000
Semiannual Coupon = $28,400

Time to Maturity = 4 years
Semiannual Period = 8

Semiannual Amortization of Discount = Discount on Bonds Payable / Semiannual Period
Semiannual Amortization of Discount = $88,188 / 8
Semiannual Amortization of Discount = $11,024

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $28,400 + $11,024
Semiannual Interest Expense = $39,424

Answer 2.

Total bond interest expense over life of bonds: Amount repaid: 8 payments of 28400 Par value at maturity Total repaid Less: amount borrowed Total bond interest expense 227200 710000 937200 621812 315388

Answer 3.

Carrying Value Semiannual Period End 01/01/2017 06/30/2017 12/31/2017 06/30/2018 12/31/2018 Unamortized Discount 88188 77164 66140 55116 44092 621812 632836 643860 654884 665908

Answer 4.

Credit Date June 30, 2017 Debit 39,424 General Journal Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash 11,024 28,400 Dec 31, 2017 39,424 11,024 28,400