Question

Lewis Co. produces and sells aviation equipment. On the first day of its fiscal year, Lewis Co. issued $90,000,000 of three-year, 11% bonds at a market (effective) interest rate of 13%, with interest payable semiannually. Compute the following: a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 8 and Exhibit 10. Round to the nearest dollar b. The amount of discount to be amortized for the first semiannual interest payment period, using the Interest method. Round to the nearest dollar C. The amount of discount to be amortized for the second semiannual interest 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

Answer 1

The cash proceeds from the bond issuance would be calculated by discounting the interest payments and principal at the market interest rate. The discount on bonds issued is the difference between face value and proceeds and is amortized using the interest method over the life of the bonds. The bond interest expense for the first year is the total interest recognized based on the market rate and the adjusted bond carrying value.

Step-by-step explanation:

To calculate the cash proceeds from the sale of bonds, we must discount the interest payments and the face value repayment at the end of 3 years at the market interest rate of 13%, using present value tables. Given that the bond pays semiannual interest, we will receive 6 interest payments of $4,950,000 (11% of $90,000,000 divided by 2) and a single payment of $90,000,000 at maturity. The present values of these amounts, when discounted at a semiannual market rate of 6.5% (13% annual rate divided by 2), will give us the proceeds from the bond sale.

For the amount of discount to be amortized using the interest method, we need to first find the initial bond discount which is the difference between the face value and the cash proceeds. Then for the first semiannual interest period, we calculate the interest expense at the market rate on the carrying amount of the bonds and subtract the actual cash paid for interest. This difference is the amount of discount amortized in the first period. The same method is used for the second period with the adjusted carrying amount after the first period's amortization. Since specific present value factors are not given here, exact calculations cannot be performed.

The bond interest expense for the first year will be the sum of the interest expenses calculated for the first and second semiannual periods based on the market rate and the adjusted carrying amount of the bonds.