Question

ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar)?

Answer 1

ABC will pay bond holders $536.80 on July 1

Step-by-step explanation:

The carrying value of the bonds=$92,280

Market value=$100,000

Meaning the bonds were issued at a discount of;

Discount=Market value-carrying value of the bonds

Discount=(100,000-92,280)=$7,720

From January 1 to July 1 is exactly 6 months.

Cash paid after 6 months=Semiannual interest payments

Semiannual interest payments=(10%/2)×100,000=(0.05×100,000)=5,000

Interest expense=92,280×(12%/2)=(0.06×92,280)=5,536.80

Discount amortized=Interest expense-cash paid

Discount amortized=(5,536.80-5,000)=536.80

ABC will pay bond holders $536.80