Question

Garcia Company issues 10%, 15-year bonds with a par value of $240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117 ¼. The effective interest method is used to allocate interest expense. 1. Using the implied selling price of 117 ¼, what are the issuer's cash proceeds from issuance of these bonds? 2. What total amount of bond interest expense will be recognized over the life of these bonds? 3. What amount of bond interest expense is recorded on the first interest payment date?

Answer 1

1. Cash proceed is $281,400.

2. Total bond interest expenses over the bond llife is $318,600.

3. Bond interest expense on first interest payment date is $11,256.

Step-by-step explanation:

1. Using the implied selling price of 117 ¼, what are the issuer's cash proceeds from issuance of these bonds?

Selling price = 117 ¼ / 100 = 1.1725

Cash proceed = Bond face value * Bond selling price = $240,000 * 1.1725 = $281,400.

2. What total amount of bond interest expense will be recognized over the life of these bonds?

Total interest payment = $240,000 * 10% * 15 = $360,000

Total repayment = Total interest payment + Bond par value = $360,000 + $240,000 = $600,000

Total bond interest expenses over the bond llife = Total repayment - Cash proceed/Amount borrowed = $600,000 - $281,400 = $318,600

3. What amount of bond interest expense is recorded on the first interest payment date?

Bond interest expense on first interest payment date = Cash proceed * Annual market rate on issue date * (6/12) = $281,400 * 8% * 0.5 = $11,256