Enviro Company issues 8%, 10-year bonds with a par value of $340,000 and semiann
ID: 2465878 • Letter: E
Question
Enviro Company issues 8%, 10-year bonds with a par value of $340,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 12. The straight-line method is used to allocate interest expense.
Using the implied selling price of 87 ½, what are the issuer's cash proceeds from issuance of these bonds?
What total amount of bond interest expense will be recognized over the life of these bonds?
What is the amount of bond interest expense recorded on the first interest payment date?
Enviro Company issues 8%, 10-year bonds with a par value of $340,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 12. The straight-line method is used to allocate interest expense.
Explanation / Answer
Ans 1 Cash proceeds from issue of bonds it is selling at $87.5 $340000/100*87.5 297500 Cash proceeds Ans Cash 297500 Discount on Bonds Payable 42500 Bonds payable 340000 Ans 2 a) Total Interest Expenses Amount To be repaid $340000*.04 13600 Semin annual period 2*10 20 PV=PMT*(1-(1-i)^-n)/i 13600*(1-1.04^20)/.04 13600*(1-.4564)/.04 13600*13.59 184824 Ans Present Value of total interest If we just see the value not the PV( just for your understanding) Total interest 272000 Par value 340000 Total 612000 Less: Cash proceeds 297500 Interest expense 314500 b) Interest Expense on the first interest payment date on carrying value 297500*10%*1/2 14875 Ans
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