Compute Bond Proceeds, Amortizing Discount by Interest Method, and Interest Expe

Question

Compute Bond Proceeds, Amortizing Discount by Interest Method, and Interest Expense Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd issued $80,000,000 of five-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following, presenting figures used in your computations: a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 5 and Exhibit 7. Round to the nearest dollar. b. The amqunt of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dolar 670,051 c. The amount of discount to be amortized for the second semiannual inerest payment period, using the interest method. Round to the nearest dollar d. The amount of the bond interest expense for the first year. Round to the nearest dollar

Explanation / Answer

A) Pv of 80 mil, n 10, r 6% plus the Pv of an annuity of 3.6 mil , n 10, r 6%

= 71,167,896

B) using your answer of 71,167,524 as the beginning carrying value, interest expense for the first semi annual period, at 6%, will be 4,270,051. Interest paid will be at 4.5% or 3,600,000, so amortisation of the bond discount will be 670,051.

C) interest expense for the second semi annual period will be at 6% of the new carrying value of 71, 837,575 (I.e. 71,167,525 plus 670,051) or 4,310,255

Amortisation will always be the difference between total interest expense and the amount paid of 3.6 mil. For the second period , that's 710,255. Carrying value is now at 72,547.830

D) total expense for 1 year will be 4310255 plus 4270051

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