Garcia Company issues 11.50%, 15-year bonds with a par value of $450,000 and sem

Question

Garcia Company issues 11.50%, 15-year bonds with a par value of $450,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 15.50%, which implies a selling price of 80 1/2. The effective interest method is used to allocate interest expense. 1. Using the implied selling price of 80 1/2, what are the issuer's cash proceeds from issuance of these bonds? 2. What total amount of bond interest expense will be recognized over the life of these bonds? 3. What amount of bond interest expense is recorded on the first interest payment date?

Explanation / Answer

Ans-

              1 Cash Proceeds $450000*80.50%                 362,250               2 Amount Repayment Interest (450000*11.50%/2)25875 Payments of                    30            776,250 Par Value            450,000 Total         1,226,250 Less Amount Borrowed            362,250 Total bond interest expense            864,000               3 Interest Payable                                  362,250 7.75%         28,074 (15.50/2)

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