Question

Chapter 10 Bond Handout Coca Cola Company issues 8%, 10-year bonds with a par value of $250,000 and semi-annual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87.5. The straight-line method is used to allocate interest expense. Show your work! 1. What are the issuer's cash proceeds from the issuance of these bonds? Make the entry to record the issuance 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? Make the entry to record the first interest payment 4. Answer the same questions assuming that the bonds have a selling price of 104.

Answer 1

1) Face value of the bonds issued Bond's selling price % Issuer's cash proceeds from bonds issued $250,000 87.5% $218,750 [$250000 x 87.5%] 2) Interest expense recognized over bond's life = Total coupon payments made + Discount on bonds payable recorded Total coupon payments made Discount on bonds payable recorded Interest expense recognized over bond's life $200,000 [$250000 x 8% x 10 years] $31,250 ($250000 - $218750] $231,250 [$200000 + $31250] 3) Interest expense on first payment = First coupon payment + Discount on bonds payable amortized for first year First coupon payment Discount on bonds payable amortized for first year Interest expense on first payment $20,000 ($250000 x 8%] $3,125 [Under straight-line method, $31250 / 10 years] $23,125 ($20000 + $3125]

4) Face value of the bonds issued Bond's selling price % Issuer's cash proceeds from bonds issued $250,000 104% $260,000 ($250000 x 104%] Interest expense recognized over bond's life = Total coupon payments made - Premium on bonds payable recorded Total coupon payments made Premium on bonds payable recorded Interest expense recognized over bond's life $200,000 ($250000 x 8% x 10 years] $10,000 ($260000 - $250000] $190,000 ($200000 - $10000] Interest expense on first payment = First coupon payment - Premium on bonds payable amortized for first year First coupon payment Premium on bonds payable amortized for first year Interest expense on first payment $200,000 [$250000 x 8%] $1,000 (Under straight-line method, $10000 / 10 years] $199,000 ($200000 - $1000]