Victor Company issued bonds with a $400,000 face value and a 3% stated rate of interest...
Victor Company issued bonds with a $400,000 face value and a 3% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 93. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year. The amount of interest expense appearing on the December 31, Year 3 income statement would be:
Homework Answers
Face Value of Bonds = $400,000
Issue Value of Bonds = $400,000 * 93%
Issue Value of Bonds = $372,000
Discount on Bonds = Face Value of Bonds - Issue Value of
Bonds
Discount on Bonds = $400,000 - $372,000
Discount on Bonds = $28,000
Annual Coupon Rate = 3.00%
Annual Coupon = 3.00% * $400,000
Annual Coupon = $12,000
Time to Maturity = 5 years
Annual Amortization of Discount = Discount on Bonds / Time to
Maturity
Annual Amortization of Discount = $28,000 / 5
Annual Amortization of Discount = $5,600
Annual Interest Expense = Annual Coupon + Annual Amortization of
Discount
Annual Interest Expense = $12,000 + $5,600
Annual Interest Expense = $17,600
Interest expense appearing on the December 31, Year 3 income statement would be $17,600
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