A company issued five-year, 7% bonds with a par value of $175,000. The market ra

Question

A company issued five-year, 7% bonds with a par value of $175,000. The market rate when the bonds were issued was 6.5%. The company received $198,975 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

$6,125.00

$3,727.50

$13,928.25

$12,250.00

$6,964.12

A company issued five-year, 7% bonds with a par value of $175,000. The market rate when the bonds were issued was 6.5%. The company received $198,975 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Explanation / Answer

Market rate being lower than coupon rate, bonds were issued at a premium.

Total bond premium = Cash received - Par value

= $(198,975 - 175,000) = $23,975

Semi-annual amortization of bond premium = $23,975 / 10 = $2,397.5

Semi-annual coupon payment = $175,000 x 7% x (6/12) = $6,125

So,

Recorded interest expense = $(6,125 - 2,397.50) = $3,727.50

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