Hoover Company sells $1,000,000 of ten-year, 8% bonds with yield to maturity at

Question

Hoover Company sells $1,000,000 of ten-year, 8% bonds with yield to maturity at 10% on January 1, 2014. The bonds pay interest annually on December 31. In the following questions, use effective interest rate method. ('8% bonds' means 8% coupon rate.)

All the questions in this Quiz 6 are based on this bond.

1. How much does Hoover finance by issuing the bonds? (Assume there is no other expenses.) (Format: $x,xxx,xxx or $xxx,xxx)

2. What is the amount of cash interest paid in 2014 on the bonds? (Format: $xxx,xxx or $xx,xxx)

3. What is the bond interest expense for 2014? (Format: $xxx,xxx or $xx,xxx)

4. What is the bond carrying value at the end of 2014? (Format: $x,xxx,xxx or $xxx,xxx)

5. What is the amount of cash interest paid in 2015 on the bonds? (Format: $xxx,xxx or $xx,xxx)

6. What is the bond interest expense for 2015? (Format: $xxx,xxx or xx,xxx)

Explanation / Answer

2. What is the amount of cash interest paid in 2014 on the bonds?

Cash Interest = $1,000,000 x 8%

.......................= $80,000

1. How much does Hoover finance by issuing the bonds?

Bonds Finance received = [$80,000 x PVAF(10 years, 10%)] + [$1,000,000 x PVIF(10 years, 10%)]

........................................= ($80,000 x 6.14457) + ($1,000,000 x 0.38554)

........................................= $491,565.37 + $385,543.29

........................................= $877,109

3. What is the bond interest expense for 2014?

Interest Expense = $877,109 x 10%

............................= $87,711

4. What is the bond carrying value at the end of 2014?

Carrying Value of Bond at the end of 2014 = $877,109 + ($87,711 - $80,000)

....................................................................= $884,820

5. What is the amount of cash interest paid in 2015 on the bonds?

Cash Interest = $1,000,000 x 8%

.......................= $80,000

6. What is the bond interest expense for 2015?

Bond Interest Expense for 2015 = $884,820 x 10%

....................................................= $88,482

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