Question

On January 1, Reynolds Inc. issued four-year bonds with a face value of $100,000. The bonds have a stated interest rate of 5 percent. When the bonds were issued, the market interest rate was 4 percent. The bonds pay interest once per year on December 31. Over the entire life of the bond, how much Interest Expense will Reynolds recognize related to this bond?

Answer 1

$16,350

Step-by-step explanation:

Issuance price = Present value of interest*PVIAF (5%, 4) + Present value of maturity amount PVIF (4%, 4)

Issuance price = $100000*5%*3.630+100000*0.855

Issuance price = $103,650

Premium on bond issue = $103,650 - $100,000

Premium on bond issue = $3,650

Total interest payment = 100000*5%*4

Total interest payment = $20,000

Interest Expense entire life of the bond = Total interest payment-Premium on bond issue

Interest Expense entire life of the bond = $20,000 - $3.650

Interest Expense entire life of the bond = $16,350