Question

11. (Show your work) ABC company sells $500.000 of 30-year, 4% bonds to yield company sells $500,000 of 30-year, 4% bonds to yield 6% on 1/1/2018. The bonds pay interest annually on 12/31. The bonds were sold at $362.352. Compute the following without prepare amortization schedule. a. The amount of cash interest paid in 2018. b. The bond interest expense reported in 2018 income statement. c. The amount of bond discount amortized in 2018. d. The book value of the bonds payable in the balance sheet as of 12/31/2018. e. The amount of total cash interest paid over the life of the bond. d in the income statements over the life of the bond. f. The total interest expense reported in the income statements over the life

Answer 1

Solution a:

Amount of cash interest paid in 2018 = $500,000 * 4% = $20,000

Solution b:

Bond interest expense for 2018 = $362,352*6% = $21,741

Solution c:

Discount amortized in 2018 = $21,741 - $20,000 = $1,741

Solution d:

Book value of bond payable in balance sheet at 31.12.2018 = Issue price + discount amortized = $362,352 + $1,741 = $364,093

Solution e:

Total cash interest paid over the life of bond = $500,000 * 4%*30 = $600,000

Solution f:

Total interest expense over life of bond = cash interest to be paid + Face value - Amount borrowed

= $600,000 + $500,000 - $362,352 = $737,648