sandersn sandersn sandersn sandersn A13-5 Debt Issuance-Interest Expense: Sander
ID: 2608090 • Letter: S
Question
sandersn sandersn sandersn sandersn A13-5 Debt Issuance-Interest Expense: Sanderson Corp. issued $20,000,000 of bonds payable on 1 June 20X5. The interest at 5.5% per annum, payable semi-annually each 31 May and 30 Nove 6% per annum. year bond each 31 May and 30 November. The bonds were issued to yield Required: 1. Calculate the proceeds from issuan bond is outstanding. ce and interest expense and interest paid for the first six months that the A the original maturity date. Also ance ifthe y eld rate is 8% and the bond is issued on 1 June 20X7, still with A the original maturity date. Also calcul bond is outstanding. ate interest expense and interest paid for the first six months that the bond is issued on 30 November 209, so calculate interest expense and interest paid for the first six months 3. Calculate the proceeds from issuance if the yield rate is 4% and the still with the original maturity date. Al that the bond is outstanding. 4. Explain why interest expense is different in requirements 1 to 3, even though interest paid is identical.Explanation / Answer
1-
value of bond
coupon payment*PVAF * face value*PVF
550000*14.88 + 20000000*.554
19264000
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 3% for 20 semiannual period
1-(1+r)^-n/r
1-(1.03)^-20 / .03
14.88
PVF at 20th semiannual period
1/(1+r)^n
1/(1.03)^20
0.554
Face value of bond
20000000
proceeds from issuance
19264000
discount on bonds payable
736000
amount of interest paid
20000000*2.25%
550000
discount amortized using effective interest rate method
577920-550000
27920
interest expense = interest paid + discount amortized
19264000*3%
577920
value of bond
coupon payment*PVAF * face value*PVF
550000*13.59 + 20000000*.456
16594500
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 4% for 20 semiannual period
1-(1+r)^-n/r
1-(1.04)^-20 / .04
13.59
PVF at 20th semiannual period
1/(1+r)^n
1/(1.04)^20
0.456387
Face value of bond
20000000
proceeds from issuance
16594500
discount on bonds payable
3405500
amount of interest paid
20000000*2.75%
550000
discount amortized using effective interest rate method
663780-550000
113780
interest expense = interest paid + discount amortized
16594500*4%
663780
value of bond
coupon payment*PVAF * face value*PVF
550000*16.35 + 20000000*.673
22452500
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 2% for 20 semiannual period
1-(1+r)^-n/r
1-(1.04)^-20 / .04
16.35
PVF at 20th semiannual period
1/(1+r)^n
1/(1.02)^20
0.673
Face value of bond
20000000
proceeds from issuance
22452500
premium on bonds payable
2452500
amount of interest paid
20000000*2.75%
550000
premium amortized using effective interest rate method
550000-449050
100950
interest expense = interest paid - premium amortized
22452500*2%
449050
4-
proceeds from issuance
interest paid
interest expense
case 1
19264000
550000
577920
case 2
16594500
550000
663780
case 3
22452500
550000
449050
Interest paid is identical in all the three scenarios while interest expense is different due to different market rates and due to which bonds are either issued at discount or at premium so accordingly amount of discount/premium on bonds payable are adjusted into interest expense
1-
value of bond
coupon payment*PVAF * face value*PVF
550000*14.88 + 20000000*.554
19264000
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 3% for 20 semiannual period
1-(1+r)^-n/r
1-(1.03)^-20 / .03
14.88
PVF at 20th semiannual period
1/(1+r)^n
1/(1.03)^20
0.554
Face value of bond
20000000
proceeds from issuance
19264000
discount on bonds payable
736000
amount of interest paid
20000000*2.25%
550000
discount amortized using effective interest rate method
577920-550000
27920
interest expense = interest paid + discount amortized
19264000*3%
577920
value of bond
coupon payment*PVAF * face value*PVF
550000*13.59 + 20000000*.456
16594500
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 4% for 20 semiannual period
1-(1+r)^-n/r
1-(1.04)^-20 / .04
13.59
PVF at 20th semiannual period
1/(1+r)^n
1/(1.04)^20
0.456387
Face value of bond
20000000
proceeds from issuance
16594500
discount on bonds payable
3405500
amount of interest paid
20000000*2.75%
550000
discount amortized using effective interest rate method
663780-550000
113780
interest expense = interest paid + discount amortized
16594500*4%
663780
value of bond
coupon payment*PVAF * face value*PVF
550000*16.35 + 20000000*.673
22452500
coupon payment
20000000*2.75%
550000
face value
20000000
PVAF at 2% for 20 semiannual period
1-(1+r)^-n/r
1-(1.04)^-20 / .04
16.35
PVF at 20th semiannual period
1/(1+r)^n
1/(1.02)^20
0.673
Face value of bond
20000000
proceeds from issuance
22452500
premium on bonds payable
2452500
amount of interest paid
20000000*2.75%
550000
premium amortized using effective interest rate method
550000-449050
100950
interest expense = interest paid - premium amortized
22452500*2%
449050
4-
proceeds from issuance
interest paid
interest expense
case 1
19264000
550000
577920
case 2
16594500
550000
663780
case 3
22452500
550000
449050
Interest paid is identical in all the three scenarios while interest expense is different due to different market rates and due to which bonds are either issued at discount or at premium so accordingly amount of discount/premium on bonds payable are adjusted into interest expense
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