Question

When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $560,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Q.6 - What is the interest expense for 2018?

Answer #1

Issue Price: | |||||||||

Present value of interest received for 8 periods ($ 28000* Annuity of period 8 at 5.5% i.e.6.3346) | 177369 | ||||||||

Present value of Maturity amount received at the end of Year-4 ($ 560,000* PVF i.e. 0.6516) | 364896 | ||||||||

Issue Price: | 542265 | ||||||||

Discouont on Bonds issue: 560,000-542265 = | 17735 | ||||||||

Amortization table | |||||||||

Date | Cash interest | Interest | Discount | Unamortized | Carrying | ||||

Expense | Amortized | Discount | value of Bonds | ||||||

30.06.2018 | 28000 | 29825 | 1825 | 15910 | 544090 | ||||

31.12.2018 | 28000 | 29925 | 1925 | 13985 | 546015 | ||||

Total Interest expense for year 2018 : 29825+29925 = 59750 | |||||||||

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