QS 10-6 Straight-Line: Bond computations LO P2 Enviro Company issues 8%, 10-year

Question

QS 10-6 Straight-Line: Bond computations LO P2 Enviro Company issues 8%, 10-year bonds with a par value of $320,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 12. The straight-line method is used to allocate interest expense.

1. 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?

3. What is the amount of bond interest expense recorded on the first interest payment date?

Explanation / Answer

Solution:

a. 320,000 * .875= 280,000 proceeds

b. Twenty semiannual interest payments of $12,800*...............$256,000

Plus bond discount ($320,000 - $280,000).................................40,000

Total bond interest expense.....................................................$296,000

*$320,000 x 0.08 x ½ = $12,800

c. Bond interest expense on first payment date: $296,000 / 20 semiannual periods

= $14,800 (rounded to whole dollars)

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