Question

Gingrich Corporation issued $2,000,000 in bonds on January 1, 2020. The bonds have a coupon rate of 1.5% and pay interest semi-annually on July 1st and January 1st. The bonds have a 10 year term. The market rate at the issue date is 3.9%. What amount of interest expense will be recorded on July 1, 2020 (the first interest payment)

Answer 1

$31,310.35

Step-by-step explanation:

Face value = 2,000,000

Semiannual interest = 2,000,000 *0.015 * 6/12= 15,000

Semiannual yield = 3.9*6/12= 1.95%

Semiannual months = 10*2= 20

Issue price =[PVA 1.95%,20 * Interest] + [PVF 1.95%,20 * Face value]

Issue price = [16.43061*15,000]+ [ .67960* 2,000,000]

Issue price = 246459.10+ 1,359,200

Issue price = $1,605,659.10

The amount of interest expense to be recorded on July 1, 2020 (the first interest payment = Issued price * Semi annual yield

= $1,605,659.10 * 1.95%

=$1,605,659.10 * 1.95%

=$31,310.35

Thus, the amount of $31,310.35 will be recorded as the interest expense on July 1, 2020