Question

(within oute the debt-to-equity ratio for each of the following companies. Which company appears to have a riskier financing structure? Explain. OS 10-13 Debt-to-equity ratio pay ce of Spokane Company 1 Total liabilities ...... Total equity ........... Atlanta Company $429,000 572,000 $ 549.000 1,830,000 19 Curcia Company issues 10%. 15-year bonds with a par value of $240.000 and semiannual interest pay- ents. On the issue date, the annual market rate for these bonds is 14%, which implies a selling price of 754. The effective interest method is used to allocate interest expense. 1. What are te issuer's cash proceeds from issuance of these bonds? 2. What toamount of bond interest expense will be recognized over the life of these bonds? 3. What are of bond interest expense is recorded on the first interest payment date? OS 10-14 Effective Interest: Bond discount computations p5

Answer 1

1.

Total Issue cash proceeds:

Face Value of Bond = $240,000

Selling Price of Bonds = 75.25

Therefore, Cash Proceeds from issue of bonds = $240,000 * 75.25% = $180600

2.  

Total Amount of bond interest expense:

Interest to be paid over the life of bond = $360000

(240000*10%*15)

Add: Discount to be amortized = $59,400

Total Interest expense = $419,400

3.  

Bond interest expense to be record on first interest payment due :

Carrying amount of bond = $180600

Interest expense = $180600*14%*1/2

Interest Expense = $12642