Question

Compute Bond Proceeds, Amortizing Premium by Interest Method, and Interest Expense Ware Co. produces and sells...

Compute Bond Proceeds, Amortizing Premium by Interest Method, and Interest Expense

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued $10,000,000 of four-year, 13% bonds at a market (effective) interest rate of 11%, with interest payable semiannually. Compute the following:

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 5 and Exhibit 7. Round to the nearest dollar.
$

b. The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.
$

c. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.
$

d. The amount of the bond interest expense for the first year. Round to the nearest dollar.
$

Homework Answers

Answer #1

As interest is semi annual, to calculate Present value interest rate will be 11% / 2 = 5.5% and number of years = 4* 2 = 8 years.

Present value of principal (Present value of $1 @ 5.5% interest and n = 8 is 0.652) = 10,000,000 * 0.652 = 6,520,000

Present value of annuity of semi annual interest payments of 6.5% of 10,000,000 (present value @ 5.5% interest n = 8 is 6.334) = 650,000 * 6.334 = 4,117,100

Carrying value of bond = Present value of principal + Present value of interest payments

= 6,520,000 + 4,117,100

= 10,637,100

a.

The amount of cash proceeds from the sale of the bonds = 10,637,100

b.

Period Effective interest @ 5.5% of balance carrying value Interest paid @ 6.5% of 10,000,000 Plug for Premium amortization Bond Carrying value
0 10,637,100
1 585,041 650,000 64,959 10,572,141

The amount of premium to be amortized for the first semiannual interest payment period, using the interest method = 64,959  

c.

Period Effective interest @ 5.5% of balance carrying value Interest paid @ 6.5% of 10,000,000 Plug for Premium amortization Bond Carrying value
0 10,637,100
1 585,041 650,000 64,959 10,572,141
2 581,468 650,000 68,532 10,503,609

The amount of premium to be amortized for the second semiannual interest payment period, using the interest method = 68,532

d.

The amount of the bond interest expense for the first year = 650,000 - 64,959 = 585,041

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