Enviro Company issues 8.50%, 10-year bonds with a par value of $260,000 and semi
ID: 2461351 • Letter: E
Question
Enviro Company issues 8.50%, 10-year bonds with a par value of $260,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5.50%, which implies a selling price of 123 5/8. The straight-line method is used to allocate interest expense
1.using implied selling price of 123 5/8, what are the issuer's cash proceeds from insurance of these bonds?
2. what total amount of bond interest expense will be recognized over the life of these bonds?
3. what is the amount of bond interest expenses recorded on the first interest payment date?
(can you show your work so I get the problem, thanks!)
Explanation / Answer
Answer No. 1
Bond’s selling price is 123.625 (at premium)
Particulars
Dr.
Cr.
Cash (123.625% x $260,000)
$321,425
Bonds payable
$260,000
Premium on Bonds payable (difference)
$61,425
Issuers Cash Proceeds=123.625%*$260000
Issuers Cash Proceeds=$321,425
Answer No. 2
Total interest over life when straight-line amortization is used = (Stated rate x Face x Life) - Premium
= .085 x $260,000 x 10 - $61,425 = $159,575
Answer No. 3
Interest cash payment = [(Stated rate) / (Payments per year)] x (Face amount).
Premium on Bond payable = Premium/ No. of semiannual payments
First Interest payment:
Particulars
Dr.
Cr.
Bond Interest expense (difference)
$7,978.75
Premium on Bond payable
($61,425/20)
$3,071.25
Cash Payable (.085 / 2 x $260,000)
$11,050
Particulars
Dr.
Cr.
Cash (123.625% x $260,000)
$321,425
Bonds payable
$260,000
Premium on Bonds payable (difference)
$61,425
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