Question

Item2 10 points Item 2Item 2 10 points On January 1, 2020, Mirada, Inc. issued five year bonds with a face value of $100,000 and an annual stated rate of 8%. Interest payments are made annually on December 31st. The bonds were issued for $108,425, when the market rate of interest was 6%. How much interest expense would Mirada record for 2020

Answer 1

15

Step-by-step explanation:

Answer 2

Mirada, Inc.

The interest expense that Mirada would record for 2020 is:

$6,315 ($8,000 - $1,685).

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $100,000

Annual interest rate = 8%

Annual interest expense = $8,000 ($100,000 * 8%)

Issued value of the bonds = $108,425

The bonds were issued at a premium of $8,425

Premium Amortization over five years on a straight-line basis = $1,685 ($8,425/5).

This implies that the interest expense will be reduced by $1,685 per annum.