Question

A company issues $16300000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $15923229. What is interest expense for 2021, using straight-line amortization?

Answer 1

Solution:

As given in question,

Bond Face Value = $16,300,000

Issue Price = $15,923,229

Bond Life = 20 years

Therefore, Discount on Issue of Bond = $16,300,000 - $15,923,229 = $376,771

As straight line amortization is to be used,

then annual straight line amortization = $376,771 / 20 = $18,838.55

Calculation of Interest Expense:

Interest Expense during 2021 = Cash Interest Payment during 2021 + Discount Amortized in year

= (Face Value * Coupon Rate) + $18,838.55

= ($16,300,000 * 5.8%) + $18,838.55

= $945,400 + $18,838.55

= $964,238.55

Therefore, Interest expense during 2021 = $964,238.55