? ? ezto.mheducation.com.hmtpx QS 10-6 Straight-Line: Bond computations LO P2 En

ID: 2531551 • Letter: #

Question

? ? ezto.mheducation.com.hmtpx QS 10-6 Straight-Line: Bond computations LO P2 Enviro Company issues 8%, 10-year bonds with a par value of $300,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10% which implies a selling price of 87 '2.The straight-line method is used to allocate interest expense ? Using the implied selling price of 87 ½ 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? 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 3. What is the amount of bond interest expense reoorded on the first interest payment date? Windows ?, ?? [? ? 1.,-013;?? Window

Explanation / Answer

Enviro Company

Cash proceeds = $300,000 x 87½% = $262,500

Total bond interest expense over life of bonds:

Amount repaid:

payments of

$12,000

$240,000

Par value at maturity

$300,000

Total repayments

$540,000

Less: amount borrowed

$262,500

Total bond interest expense

$277,500

Note – computation semiannual interest payment = $300,000 x 8% x 6/12 = $12,000

Semiannual periods in 10-year bond life = 10 x 2 = 20 periods of interest payments

$262,500 x 10% x 6/12 = $13,125