Question

On January 1st, 2013 Kemp Industries issued $20M of 15-year 7% semiannual bonds. The market rate at the time of the issuance was 9%.

1. Were the bonds issued at a premium or a discount? How do you know?

2. Suppose Kemp received $16,742,222 for the bonds. How would the bonds payable appear on the balance sheet?

3. The first interest payment is due July 1st. How much will Kemp pay in interest?

4. How much is interest expense and how much is the amortization of the discount/premium for the period ended June 30th, 2013 using the effective interest method?

Answer 1

Solution 1:

As market rate of interest is higher than stated rate, therefore bonds were issued at discount.

Solution 2:

Kemp Industries
Balance Sheet (Partial)
As of January 1, 2013
Particulars		Amount
Long term liabilities:
Bond Payable	$20,000,000.00
Less: Discount on bond payable	$3,257,778.00
Net Bond Liability		$16,742,222.00

Solution 3:

Amount to be paid in interest = $20,000,000*7%*6/12 = $700,000

Solution 4:

Interest expense for period ending 30.06.2013 = $16,742,222 * 9%*6/12 = $753,400

Amortization of discount on 30.06.2013 = $753,400 - $700,000 = $53,400