QS 10-8 Straight-Line: Bond computations LO P3 Enviro Company issues 10.00%, 10-

Question

QS 10-8 Straight-Line: Bond computations LO P3

Enviro Company issues 10.00%, 10-year bonds with a par value of $420,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 7.00%, which implies a selling price of 127 5/8. The straight-line method is used to allocate interest expense.

1. Using the implied selling price of 127 5/8. 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 Cash proceeds from issuance = 420000*127.625%= 536025 2 Total cash interest to be paid 420000 Maturity amount 420000 Less: Proceeds from issuance 536025 Total amount of bond interest expense 303975 3 Semi annual interest = 420000*10%/2= 21000 Straight line premium amortization =(536025-420000)/20= 5801 Bond interest expense = 21000-5801= 15199

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