Question

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware issued $35,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, 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 amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. $ c. The amount of premium 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

a. The amount of cash proceeds from the sale of the bonds is $170,328,650. b. The amount of premium to be amortized for the first semiannual interest payment period is -$12,832,865. c. The amount of premium to be amortized for the second semiannual interest payment period is -$12,832,865. d. The amount of the bond interest expense for the first year is $34,065,730.

Step-by-step explanation:

a. To calculate the amount of cash proceeds from the sale of the bonds, we need to use the present value tables. The present value tables help us determine the present value of future cash flows. The cash proceeds from the sale of the bonds is the present value of the bond payments. In this case, the bond payments are the bond's face value ($35,000,000) and the interest payments over the five-year term of the bond. We can use the present value of an ordinary annuity table to calculate the present value of the interest payments. The present value of an ordinary annuity of $1 for five years at 10% is 3.79079. Therefore, the present value of the interest payments is $35,000,000 × 3.79079 = $135,328,650. The cash proceeds from the sale of the bonds is the sum of the face value and the present value of the interest payments, which is $35,000,000 + $135,328,650 = $170,328,650.

b. The amount of premium to be amortized for the first semiannual interest payment period can be calculated by subtracting the interest expense at the market rate from the bond interest expense at the coupon rate. The bond interest expense at the coupon rate is the face value of the bond multiplied by the coupon rate, which is $35,000,000 × 12% = $4,200,000. We can calculate the interest expense at the market rate using the effective interest method. The bond carrying value at the beginning of the first semiannual interest payment period is $170,328,650. The market (effective) interest rate is 10%. Therefore, the interest expense at the market rate is $170,328,650 × 10% = $17,032,865. The amount of premium to be amortized for the first semiannual interest payment period is $4,200,000 - $17,032,865 = $-12,832,865.

c. The amount of premium to be amortized for the second semiannual interest payment period can be calculated using the same process as in part b. The bond carrying value at the beginning of the second semiannual interest payment period is the bond carrying value at the end of the first semiannual interest payment period, which is $170,328,650. The market (effective) interest rate is still 10%. Therefore, the interest expense at the market rate is $170,328,650 × 10% = $17,032,865. The amount of premium to be amortized for the second semiannual interest payment period is $4,200,000 - $17,032,865 = $-12,832,865.

d. The amount of the bond interest expense for the first year is the sum of the interest expense at the market rate for the first semiannual interest payment period and the interest expense at the market rate for the second semiannual interest payment period, which is $17,032,865 + $17,032,865 = $34,065,730.