Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiann

Question

Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5%, which implies a selling price of 123 %. The straight-line method is used to allocate interest expense. 1. Using the implied selling price of 123 %, what are the issuer's cash proceeds from issuance of these bonds. Cash proceeds 2. What total amount of bond interest expense will be recognized over the life of these bonds? Total bond interest expense over life of bonds Amount repaid payments of Par value at maturity Total repayments Less amount borrowed (from part 1) Total bond interest expense 3. What is the amount of bond interest expense recorded on the first interest payment date? Bond interest expense

Explanation / Answer

Req 1. Par value of Bonds 250000 Number of bonds 2500 Issue price per bond 123.375 Cash proceeds of Bonds 308437.5 Req 2. Par value of bonds 250000 Stated rate of interest 8% Cash interest on Semi annual rest 10000 (250000*8%*6/12) Total Bond interest expenses: Amount repaid: 20 payments of 10000 each 200000 Par value of bonds 250000 Total repayments 450000 Less: Amount borrowed 308437.5 Total Bond interest expenses: 141562.5 Req 3. Interest expense on First interest payment date: Cash interest payment 10000 (250000*8%*6/12) Less: Premium amortized 2922 (308437.50-250000)/20 Interest expense on First interest payment date: 7078

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