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.
$
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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