Question

Garcia Company issues 12.50%, 15-year bonds with a par value of $470,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 16.50%, which implies a selling price of 81. The effective interest method is used to allocate interest expense. 1. Using the implied selling price of 81, what are the issuer's cash proceeds from issuance of these bonds? 2. What total amount of bond interest expense will be recognized over the life of these bonds? 3. What amount of bond interest expense is recorded on the first interest payment date?

sing the implied selling price of 81, what are the issuer's cash proceeds from issuance of these bonds?

Total Bond Interest Expense Over the Life of bonds

What amount of bond interest expense is recorded on the first interest payment date?

Answer 1

Garcia Company issues 12.50%, 15-year bonds with a par value of $470,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 16.50%, which implies a selling price of 81. The effective interest method is used to allocate interest expense.

to using the implied selling price of 81, what are the issuer's cash proceeds from issuance of these bonds ? long compute the cash proceeds from the issue of bends using the equation as follows: cash proceeds = par value & implied selling price price 100 . $ 470,000 x $81 100 • $ 380,700 Hence, the cash proceeds from the issue of bonds are $ 380, 700. 2. what total amount of bond intrest expense will be recognized over the life of these bonds? from compute the amount of bond interest expense to be recognized over the life of bonds using the equation as follows:

Bond interest expense (semi-annual coupon payments x Number of payments + pervaluo - cash proceeds) - $ 29,375 x 30 + $ 490,000 - $ 380,700 : $ 881,250 + $ 89,300 = $ 470,550. The amount of bond intrest expense to be recognized over the life of bonds is $970,550. working Note: compute the semi-annual coupon payment using the equation as follows: Semi-annual coupon payment a parvake x coepon rate 12.50-4 : $ 470,000 X- • $ 29,375 Hence, the semi-annual coupon payment is $ 29,375

3, what amount of bond intrest expense is recorded on the first interest payment date ? Ans. Compute the amount of bond interest expense to be recorded on the first interest payment data using the equation as follows: Bond interest expense = cash proceeds x Somi-annual market rate - $ 380, 700 x 16.50%- • $ 31,407 75 The amount of bond recorded on the first is $ 31,407.75. intrest interest expense to be payment date