Question

Check my Enviro Company issues 11.50%, 10-year bonds with a par value of $320,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8.50%, which implies a selling price of 125 1/8. The straight-line method is used to allocate interest expense 1. Using the implied selling price of 125 1/8. what are the issuer's cash proceeds from issuance of these bonds? Cath 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 maturity Total repayments Less amount borrowed from part 1) Total bond interest expense

Answer 1

1.

Par value of bonds = $320,000

Issue price = 125 1/8

Cash proceeds from issuance of bonds = 320,000 x 125 1/8

= $400,400

2.

Semi annual interest payment = 320,000 x 11.50% x 6/12

= $18,400

Total Bond Interest Expense Over Life of Bonds:
Amount repaid:
20 payments of $18,400	368,000
Par value at maturity	320,000
Total repayments	688,000
Less amount borrowed (from part 1)	-400,400
Total bond interest expense	$287,600

3.

Premium on bonds payable = Cash proceeds from issuance of bonds - Par value of bonds

= 400,400-320,000

= $80,400

Semi annual bond premium amortization = 80,400/20

= $4,020

Bonds interest expense = Semi annual interest payment-Semi annual bond premium amortization

= 18,400-4,020

= $14,380

Kindly comment if you need further assistance.

Thanks‼!