Compute Bond Proceeds, Amortizing Premium by Interest Method, and Interest Expen
ID: 2409751 • Letter: C
Question
Compute Bond Proceeds, Amortizing Premium by Interest Method, and Interest Expense Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware issued $35,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. Compute the following, presenting figures used in your computations: a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 5 and Exhibit 7. Round to the nearest dollar. b. The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. c. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar. d. The amount of the bond interest expense for the first year. Round to the nearest dollar.Explanation / Answer
Answers
---face value = $ 35,000,000
---Term = 5 years.
---Interest rate = 12% annually
---Interest payment = semi annually.
---Interest payable at rate of 6% [12% x 6/12]
---Total number of terms (for interest payment) = 5 years x 2 times per year = 10 terms.
---Marker rate = 10%, semi annually = 5%
---Table to look at :
Table 1:Present value of $1 at compound interest for 5% at ‘10’ period = value = 0.61391
Table 2: Present value of Annuity $1 for 5% at ‘10th’ period= value = 7.72173
PV of
$ 350,00,000.00 [Bond Face Value]
at
Market Interest rate 5.0%
Interest rate for
10 term payments
PV of $1
0.61391 [Table 1]
PV of
$ 350,00,000.00
=
$ 350,00,000.00
x
0.61391
=
$ 214,86,850.00
A
Interest payable per term
at
6.0%
on
$ 350,00,000.00
Interest payable per term
$ 21,00,000.00
PVAF of 1$
for
5.0%
Interest rate for
10 term payments
PVAF of 1$
7.72173 [Table 2]
PV of Interest payments
=
$ 21,00,000.00
x
7.72173
=
$ 162,15,633.00
B
Bond Value (A+B)
$ 377,02,483.00
Period
Cash payment
Interest expense (for Answer ‘d’)
Premium on Bonds payable ( For answer ‘b’ and ‘c’)
Carrying Value of Bond
[A = 35000000 x 12% x 6/12]]
[B]
[C = B – A ]
[D]
Issued
$ (27,02,483.00)
$ 377,02,483.00
1st interest payment
$ 21,00,000.00
$ 18,85,124.00 [37702483 x 10% x 6/12]
$ (2,14,876.00)
$ 374,87,607.00
2nd Interest payment
$ 21,00,000.00
$ 18,74,380.00 [37487607 x 10% x 6/12]
$ (2,25,620.00)
$ 372,61,987.00
Amount of Premium amortised = $ 214,876
Amount for premium amortised = $ 225,620
Total Bonds Interest expense for Year 1 = 1885124 + 1874380 = $ 3,759,504
PV of
$ 350,00,000.00 [Bond Face Value]
at
Market Interest rate 5.0%
Interest rate for
10 term payments
PV of $1
0.61391 [Table 1]
PV of
$ 350,00,000.00
=
$ 350,00,000.00
x
0.61391
=
$ 214,86,850.00
A
Interest payable per term
at
6.0%
on
$ 350,00,000.00
Interest payable per term
$ 21,00,000.00
PVAF of 1$
for
5.0%
Interest rate for
10 term payments
PVAF of 1$
7.72173 [Table 2]
PV of Interest payments
=
$ 21,00,000.00
x
7.72173
=
$ 162,15,633.00
B
Bond Value (A+B)
$ 377,02,483.00
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