6. Bonds payable are dated January 1, 2016, and are issued on that date. The fac

Question

6. Bonds payable are dated January 1, 2016, and are issued on that date. The face value of the bonds is $200,000, and the face rate of interest is 8%. The bonds pay interest semiannually. The bo rate of interest at the time of issuance was 6%. nds will mature in five years. The market REQUIRED: 1. What is the bond issuance price? 2. Using the effective interest amortization method, what amount should be amortized for the first six-month period? What amount of interest expense should be reported for the first six-month period? 3. Using the effective interest amortization method, what amount should be amortized for the period from July 1 to December 31, 2016? What amount of interest expense should be reported for the period from July 1 to December 31, 2016?

Explanation / Answer

Answer 1.

Face Value = $200,000
Annual Coupon Rate = 8%
Semi-annual Coupon rate = 4%
Semi-annual Coupon = 4%*$200,000 = $8,000
Annual Interest Rate = 6%
Semi-annual Interest rate = 3%
Semi-annual period to maturity = 10 (5 years)

Proceed from Issue of Bonds = $8,000 * PVA of $1 (3%, 10) + $200,000 * PV of $1 (3%, 10)
Proceed from Issue of Bonds = $8,000 * (1 - (1 / 1.03)^10) / 0.03 + $200,000 / 1.03^10
Proceed from Issue of Bonds = $217,060

Answer 2.

Interest Expense for Jan. 01 - June 30 = $217,060 * 3%
Interest Expense for Jan. 01 - June 30 = $6,512

Semi-annual Coupon = $8,000

Amortization of Premium = $8,000 - $6,512
Amortization of Premium = $1,488

Carrying Value on June 30 = $217,060 - $1,488
Carrying Value on June 30 = $215,572

So, Interest expense should be reported for the first six-month period is $6,512

Answer 3.

Interest Expense for July 01 - Dec. 31 = $215,572 * 3%
Interest Expense for July 01 - Dec. 31 = $6,467

Semi-annual Coupon = $8,000

Amortization of Premium = $8,000 - $6,467
Amortization of Premium = $1,533

Carrying Value on June 30 = $215,572 - $1,533
Carrying Value on June 30 = $214,039

So, Interest expense should be reported for the period from July 1 to Dec. 31 is $6,467

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