QS 10-14B Effective Interest: Bond discount computations LO P5 Garcia Company is

Question

QS 10-14B Effective Interest: Bond discount computations LO P5

Garcia Company issues 12.50%, 15-year bonds with a par value of $470,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 16.50%, which implies a selling price of 81. The effective interest method is used to allocate interest expense.

1. Using the implied selling price of 81, 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

1. Cash proceeds from the issuance of bonds = (Semi-Annual interest payment x PVA8.25%,30) + (Face value x PV8.25%,30)

= ($29375 x 10.997360) + ($470000 x 0.0927177)

= $366625

2. Total amount of bond interest expense = Payment of cash interest + Amortization of discount

= ($29375 x 30) + ($470000 - $366625)

= $881250 + $103375

= $984625

3. Bond interest expense on the first payment date = $366625 x 8.25% = $30247

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