QS 10-15B Effective Interest: Bond premium computations LO P6 Garcia Company iss

Question

QS 10-15B Effective Interest: Bond premium computations LO P6

Garcia Company issues 10%, 15-year bonds with a par value of $290,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117 14. The effective interest method is used to allocate interest expense.
     
1. Using the implied selling price of 117 14, 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 amount of bond interest expense is recorded on the first interest payment date?
  

Explanation / Answer

1 Cash proceeds from issuance = 290000*117.25%= 340025 2 Total cash interest to be paid 435000 Maturity amount 290000 Less: Proceeds from issuance 340025 Total amount of bond interest expense 384975 3 Bond interest expense =340025*8%/2= 13601

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