Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on january 1, 2017. interest is paid on june 30 and december 31. the proceeds from the bonds are $14,703,108. using effective-interest amortization, how much interest expense will be recognized in 2017?

Answer 1

$1,176,374

Step-by-step explanation:

total interest expense = coupon + discount amortization =

• coupon = $15,000,000 x 7.8% = $1,170,000
• effective interest method for the first 6 months = ($14,703,108 x 4%) - ($15,000,000 x 3.9%) = $588,124.32 - $585,000 = $3,124.32
• effective interest method for the first 6 months = ($14,706,232.32 x 4%) - ($15,000,000 x 3.9%) = $588,249.29 - $585,000 = $3,249.29

total interest expense = $1,170,000 + $3,124.32 + $3,249.29 = $1,176,373.61 ≈ $1,176,374

Answer 2

$1,185,000 interest expense will be recognized in 2017.

Step-by-step explanation:

The bond issued on discount has two things to charge as an interest expense, the coupon payment and the discount amortization. The discount given on the bond is amortized over the life of the bond and charged to the interest expense account

Discount given = Face value - Proceeds received = $15,000,000 - 14,703,108 = $296,892

Each period amortization = $296,892 / (20 x 2 ) = $7,422.3

Coupon payment = 15,0000,000 x 7.8% / 2 = $585,000

Total interest Expense = Coupon Payment + Discount amortization = 585,000 + $7,422.3 = $592,422.3 per period

Effective interest Amortization rate = 592,422.3 x 2 / 15,000,000 = 7.9%

Expense for 2017 = 15,000,000 x 7.9% = $1,185,000