Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiann

Question

Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5%, which implies a selling price of 123 . The straight-line method is used to allocate interest expense. 1.Using the implied selling price of 123 , what are the issuer's cash proceeds from issuance 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 expense recorded on the first interest payment date?

Explanation / Answer

1. The amount of issuers cash proceeds from issuance of the 8%, 10 year bonds having par value of $250,000 is as under: The selling price is of 123.375% (fraction of 3/8 is 0.375). The bonds are issued at premium of 23.375%. The issuers cash proceeds from issuance of bonds would be $308,437.50. ($250,000*123.375%)=$308,437.50 2. The total amount of bond interest expense will be recognized over the life of these bonds would be as under; The interest expense for 10 years semiannually that is for 20 semi annual period ($10,000*20 semiannual periods)=$200,000 Interest expense ($250,000*8%)/2=$10,000 Premium on issuance of bonds(Issue price-Par value)=($308,437.50-$250,000)=$58,437.50 Total amount of bond interest expense would be as under: Interest expense $200,000 Less: Premium on bond ($58,437.50) Total amount of bond interst expense $141,563 3. The amount of bond interest expense recorded on the first interest payment date would be as under: Total amount of bond interest expense $141,563 Total number of semi annual periods 20 Bond interest expense on first payment date ($141,563/20) $ 7,078.15

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