Question

for my BUS class

Garcia Company issues 10%, 15-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%, which implies a selling price of 117 14. The effective interest method is used to allocate interest expense 1. Using the implied selling price of 117 14, 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Using the implied selling price of 117 %, what are the issuer's cash proceeds from issuance of these bonds? Cash proceeds Required 2 >

Answer 1

1.

Par value of bonds = $320,000

Issue price of bonds = 117 ¼

Cash proceeds from issue of bonds = 320,000 x 117 ¼%

= $375,200

2.

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 320,000 x 10% x 6/12

= $16,000

Total bond interest expense over the life of the bonds

Amount repaid
30 payments of $16,000	480,000
Par value at maturity	320,000
Total repayments	800,000
Less amount borrowed (from part 1)	- 375,200
Total bond interest expense	$424,800

3.

Bond interest expense to be recorded on first interest payment date = Carrying value of bonds at the time of issue x Market interest rate x 6/12

= 375,200 x 8% x 6/12

= $15,008