Use the following amortization table for Mechanical Autoparts to answer these qu

Question

Use the following amortization table for Mechanical Autoparts to answer these questions about the company's long-term debt: (Click the icon to view the amortization table.) 1. How much cash did Mechanical Autoparts borrow on January 31, 2017? How much cash will Mechanical Autoparts pay back at maturity on January 31, 2027? 2. How much cash interest will Mechanical Autoparts pay each six months? 3. How much interest expense will Mechanical Autoparts report on July 31, 2017, and on January 31, 2018? Why does the amount of interest expense increase each period? Explain in detail. . How much cash did Mechanical Autoparts borrow on January 31, 2017? How much cash will Mechanical Autoparts pay back at maturity on January 31, 2027? How much cash did Mechanical Autoparts borrow on January 31, 2017? $ How much cash will Mechanical Autoparts pay back at maturity on January 31, 20277 S 2, How much cash interest will Mechanical Autoparts pay each six months? 3. How much interest expense will Mechanical Autoparts report on July 31, 2017, and on January 31, 2018? Why does the amount of interest expense increase each period? Explain in detail. How much interest expense will Mechanical Autoparts report on July 31, 2017? S How much interest expense will Mechanical Autoparts report on January 31, 20187 S Why does the amount of interest expense increase each period? Interest expense increases because the as the bonds move toward matuity and themust be amortized over the lite of the bond bond carying amount produoes I must be amortized over the life of the bond bond carrying amount produces amount of interest expense each period

Explanation / Answer

1) In the amortization table the bond carrying value is $97,900 on the borrowing date (i.e. 31 January, 2017) and total discount balance is $12,100. This discount balance is amortized over the life of bond and on each period the carrying value of Bond is increased by this amortized amount.(i.e. on July 31,2017 the carrying value is increased from $97,900 to $98,577 by discount amortized of $677. This means the carrying value will increased to its redemption value at the matuarity by adding amortized discount every period of six months.

Thus in this way it can be said that company has borrowed in cash $97,900 (i.e. carrying value of bonds on January 31,2017) on January 31,2017.

The cash that will be paid by Mechanical Autoparts at matuarity on January 31,2027 is $110,000 ($97,900+$12,100)

2) The cash interest paid by Mechanical Autoparts each six months as shown in Amortization table is $2,750.

3) The interest expense reported on July 31,2017 is $3,427 ($2,750+$677) as shown in Amortization table.

The interest expense reported on January 31,2018 is $3,450 ($2,750+$700) as shown in Amortization table.

Interest expense increases because the amortized discount increases as the bonds move towards matuarity and the discount expense must be amortized over the life of the bond. Increased bonds carrying amount produces increased amount of interest expense each period.

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