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Marla, Inc. issued $6,000,000 of 12% bonds on December 1, Year 1, due on December 1,...

  1. Marla, Inc. issued $6,000,000 of 12% bonds on December 1, Year 1, due on December 1, Year 6, with interest payable each May 31 and November 30. The yield to maturity is 16%. What will be Marla, Inc.'s interest expense for the fiscal year ended November 30, Year 2 related to this bond issue?

a.

$623,372

b.

$720,000

c.

$835,610

d.

$881,046
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Homework Answers

Answer #1

Working as follows:

Issue price of the bond:
Interest [$6,000,000 × 12% × 6/12] $360,000
PVF (8%, 12) 7.53607
Maturity value $6,000,000
PVAF (8%,12) 0.397113
$2,712,985.20 $2,382,678
Issue price of bond $5,095,663.20

Prepare schedule as follows:

Date Cash payment Interest Expense Amortization of Discount Carrying value
Dec. 1 $5,095,663
May. 31 Y1 $360,000 $407,653 $47,653 $5,143,316
Nov. 30 Y1 $360,000 $411,465 $51,465 $5,194,781
May. 31 Y2 $360,000 $415,583 $55,583 $5,250,364
Nov. 30 Y2 $360,000 $420,029 $60,029 $5,310,393

Year 2 Interest Expense = $415,583 + $420,029 = $835,612

Hence, the correct option is [c]

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