On January 1, 2013, a company issued 10-year, 10% bonds payable with a par value

Question

On January 1, 2013, a company issued 10-year, 10% bonds payable with a par value of $500,000 and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight line method for amoritzation.

1) What is the amount of the discount or premium on these bonds?

2) How much cash is required each time an interest payment is made?

3) How much interest expense should be recognized every time interested is paid (semiannually). Round to the whole dollar

Explanation / Answer

1) Discount on bonds payable = 500000-442647 = 57353

2) Cash required for interest payment = 500000*10%*6/12 = 25000

3) Interest expense recognized every time interested is paid = 25000+(57353/20) = 27868

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