Question

Bond Interest Expense
Smith & Sons, Inc., sold $400,000 face value, seven percent coupon rate, four-year bonds, for an aggregate issue price of $395,000.

Calculate the total interest expense to be recorded by the company over the four-year life of the bonds.
$Answer

Answer 1

Face value of Bonds = $400,000

Issue price of bonds = $395,000

Interest rate = 7%

Interest should be payable on face value of bonds not on the issue price

Annual interest expenses = $400,000*7% = $28,000

Total interest expenses to be recorded by the company over four year life ($28,000*4) = $112,000

discount on issue of bonds = $400,000-$395,000 = $5,000 to be aortised over the period of four years

Therefore total expenses to be recorded over four years = $112,000+$5,000 = $117,000

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