Enviro Company issues 13.00%, 10-year bonds with a par value of $480,000 and sem

Question

Enviro Company issues 13.00%, 10-year bonds with a par value of $480,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10.00%, which implies a selling price of 129 1/8. The straight-line method is used to allocate interest expense.

Enviro Company issues 13.00%, 10-year bonds with a par value of $480,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10.00%, which implies a selling price of 129 l/8. The straight-line method is used to allocate interest expense. 1. Using the implied selling price of 129 1/8. what are the issuer's cash proceeds from issuance of these bonds? Cash proceeds 2. What total amount of bond interest expense will be recognized over the life of these bonds? Total Bond Interest Expense Over Life of Bonds: Amount repaid payments of Par value at maturity Total repayments Less amount borrowed (from part 1) Total bond interest expense . What is the amount of bond interest expense recorded on the first interest payment date? Bond interest expense

Explanation / Answer

Answer 1. Cash Proceeds from Bonds = $480,000 X 129.125% Cash Proceeds from Bonds = $619,800 Answer 2. Total Bond Interest Expense Over Life of Bonds: Amount Repaid: 20 payments of $ 31,200.00 $      624,000.00 Par Value at Maturity $      480,000.00 Total Repayments $ 1,104,000.00 Less: Amount Borrowed $      619,800.00 Total Bond Interest Payment $      484,200.00 Answer 3. Bond Interest Expense: Cash Paid $        31,200.00 Less: Amortization Premium on issue of Bonds - $139,800/20 $        (6,990.00) Interest Expense $        38,190.00

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