On January 1, 2014, Nowell Corporation issued $303,000 in bonds that mature in t

Question

On January 1, 2014, Nowell Corporation issued $303,000 in bonds that mature in ten years. The bonds have a stated interest rate of 6% and pay interest on June 30 and December 31 each year. When the bonds were sold, the market of interest was 6%. (FV of $1, PV of $1, FVA of $1,and PVA of $1: use the appropriate factors from the tables)

a) What was the issue price on January 1, 2014?

b) What amount of interest expense should be recorded on June 30, 2014 and December 31, 2014?

c) What amount of cash interest should be paid on June 30, 2014 and December 31, 2014?

d) What is the book value of the bonds on December 31, 2014 and December 31, 2015?

Explanation / Answer

a)Since the coupon rate (6%) is equal to the market interest rate of 6% ,it implies that the bond was issued on PAR.
Thus the issue price = $1000

b)Since its a semiannual

Semi annual coupon payement = Coupon rate * bond value = (6/2)*303000/100 = $9090

Thus amount of interest expense recorded on June 30th and Dec 31 = $9090

c)

Cash interest = interest expense - increase (or + decrease) interest payable + amortization of bond premium (or - discount)

= 9090 -0 +0 (please note that since the bond was issued at par, there is no ammortization

d)Since the bonds were issued on par, the book value remains same on December 31, 2014 and December 31, 2015 = $303,000

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