Question

Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd issued $90,000,000 of five-year, 8% bonds at a market (effective) interest rate of 10%, with interest payable semi annually. 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 Exhibits 4 & 5. 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.

Answer 1

a) Proceeds $83,050,438.56

b) discount amortization(first payment)

83,050,438.56 x 0.05 = 4,152,521.93

- 90,000,000 x 0.04 = 3,600,000

amortization 552,512.93

ending carrying value

83,050,438.56 + 552,512.93 = 83,602,96

c) discount amortization(second payment)

83,602,96 x 0.05 = 4,180,148.02

less cash outlay of 3,600,000

amortization 580,148.02

d) total interest expense for the first year

4,152,521.93 June + 4,180,148.02 Dec = 8,332,669.95

Step-by-step explanation:

We solve for the present value of the bond by discount the coupon payment and maturity at the market rate:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 3,600,000.000

time 10

rate 0.05

`3600000 * (1-(1+0.05)^(-10) )/(0.05) = PV\\`

PV $27,798,245.7451

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 90,000,000.00

time 10.00

rate 0.05

`(90000000)/((1 + 0.05)^(10) ) = PV`

PV 55,252,192.82

PV c $27,798,245.7451

PV m $55,252,192.8187

Total $83,050,438.5637