Question

FULL SCREEN PRINTER VERSION 4 BACK NEXT Question 6 Hopkins Ltd. issued five-year bonds with a face value of $180,000 on January 1. The bonds have a coupon interest rate of 8% and interest is paid semi-annually on June 30 and December 31. The market interest rate was 9% when the bonds were issued at a price of 95. Using above information, determine the proceeds received by the company when the bonds were issued. Proceeds from issue of the bonds $ LINK TO TEXT Determine the interest expense recorded for the six months ending June 30 when the first interest payment is made. Interest expense LINK TO TEXT Determine the balance in the Bonds Payable account immediately following the first interest payment. Balance in bonds payable account $ LINK TO TEXT

Answer 1

Answer to Q#6 (First question in the list): a) Par value of the bonds issued $180,000 Issue price percentage 95% (Sold at 95 as given in the question] Proceeds from issue of the bonds $171,000 ($180000 x 95%] b) Interest expense for first semiannual payment = Proceeds from issue of the bonds x Market interest rate x (1/2) Proceeds from issue of the bonds $171,000 [As calculated in Part-(a)] Market interest rate 9% Interest expense for first semiannual payment $7,695 ($171000 x 9% (1/2) --> It is multiplied by (1/2) as it is a semiannual payment] c) Though bond's issue price is different from par value, semiannual coupon payment shall be made at half of coupon rate multiplied by par value of the bonds only. As the bond is issued at price less than its par value, it is considered as 'issued at discount'. Difference between semiannual coupon payment and interest expense calculated in Part-(b) shall be considered as discount amortized. Bond's carrying value after the first intest payment will be equal to par value of the bonds reduced by carrying value of discount on bonds payable. However, it will not affect balance in bonds payable account. That is, balance in bonds payable account will continue to be par value of the bonds issued till its maturity date. However, carrying value of the bonds payable will be increased by amount of discount amortized in first interest paid. Par value of the bonds issued $180,000 Annual coupon rate associated with the bond 8% Coupon payment for first semiannual $7,200 ($180000 x 8% x (1/2) --> It is multiplied by (1/2) as it is a semiannual payment] Interest expense for first semiannual payment $7,695 [As calculated in Part-(b)] Discount amortized in first semiannual payment $495 $7695 - $7200] Discount on bonds payable when it was issued $9,000 ($180000 - $171000 (Difference between par value and issue price)] Unamortized discount on bonds payable $8,505 ($9000 - $495] Balance in bonds payable account (Carrying amount) $171,495 [After first interest payment --> $180000 - $8505 = $171495]