Question

QS 10-15B Effective Interest: Bond premium computations LO P6 Garcia Company issues 10%, 15-year bonds with a par value of $220,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117 14. The effective interest method is used to allocate interest expense 1. Using the implied selling price of 117 14. 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 payments of Par value at matunty Total repayments Less amount borrowed from part) Total bond interest expense

Answer 1

1) Selling price= 117 1/4= $117.25

Cash proceeds= $220000/100*$117.25= $257950

2)

Total Bond Interest Expense Over Life of Bonds:
Amount repaid:
30 payments of 11000 (220000*10%*6/12)	$330000
Par value at maturity	220000
Total repayments	550000
Less: Amount borrowed (from part 1)	(257950)
Total bond interest expense	$292050

Number of payments= 15*2= 30

3) Bond interest expense= $257950*8%*6/12= $10318