Question

(now your work) ABC company sells $500.000 of 30-vear. 4% bonds to vield 6% on 1/1/2018. The bonds pay interest annually on 12/31. The bonds were sold at $362.352. Compute the following without preparing an amortization schedule. a. The amount of cash interest paid in 2018. b. The bond interest expense reported in 2018 income statement. c. The amount of bond discount amortized in 2018. d. The book value of the bonds payable in the balance sheet as of 12/31/2018. e. The amount of total cash interest paid over the life of the bond. f. The total interest expense reported in the income statements over the life of the bond.

Answer 1

Cash interest paid in 2018 = Face value of the bonds x Annual coupon rate $500,000 Face value of the bonds Annual coupon rate Cash interest paid in 2018 4% $20,000 [$500000 x 4%] b) Bond interest expense for 2018 = Bond's issue price x Yield to maturity rate Bond's issue price Yield to maturity rate Bond interest expense for 2018 $362,352 6% $21,741 [$362352 x 6%] Amount of bond discount amortized in 2018 = Interest expense for 2018 - Cash interest paid in 2018 Bond interest expense for 2018 Cash interest paid in 2018 Bond discount amortized in 2018 $21,741 [Ref: Part-(b)] $20,000 (Ref: Part-(a)] $1,741 [$21741 - $20000]

d) Book value of the bonds payable at 12/31/2018 = Bond's issue price + Bond discount amortized in 2018 Bond's issue price Bond discount amortized in 2018 Book value of the bonds payable at 12/31/2018 $362,352 $1,741 [Ref: Part-(c)] $364,093 ($362352 +$1741] e) Total cash interest paid during bond's life = Number of years to maturity x Annual coupon payment Number of years to maturity Annual coupon payment Total cash interest paid during bond's life 30 $20,000 ($500000 x 4%] $600,000 [30 years x $20000] f) Total interest expense during bond's life = Total cash interest paid during bond's life - Discount on bonds issued Total cash interest paid during bond's life Discount on bonds issued Total interest expense during bond's life $600,000 (Ref: Part-(e)] $137,648 ($500000 - $362352] $462,352 ($600000 - $137648]