bond question

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  • #177081
    Anonymous
    Inactive

    alberto company issues 8% 10 year semi annual bonds with par value of 350,000. On the issue date the annual market rate for these bonds is 10%, which implies a selling price of 87.5. The straight line method is used to allocate interest expense.

    What is the total amount of bond interest expense that will be recognized over the life of these bonds?

    What is the amount of bond interest expense recorded on the first interest payment date?

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  • #409035
    iampei
    Member

    Ok…if I can understand this…since the market rate is higher than that of the stated rate, then the bond will be sold at a discount. The discount is sold at 87.5%? Therefore the bond is sold at a discount of $306,250.

    Interest expense is based on straight-line amortization. Interest Payable for the year is $350,000/10 = $35,000(annual) / 2 (since it's semi-annual) = $17500 = Semi Annual Payments

    350,000 – 306,250 = $43,750 (discount) / 10 = $4,375 / 2 = $2187.5

    Therefore = $$17500 + $2187.5 = $19687.5 = Interest expense semi annually x 2 = $39375 = Bond Interest Expense for the year

    #409036
    Anonymous
    Inactive

    that's what I thought but its not showing that to be correct

    #409037
    mangos
    Member

    Normal bond interest payable will be: 350,000 face value x 8% stated rate: 28,000 / year

    The bound issued at .875, so: 350,000 * .875 = 306,250 total proceeds, which implies a discount of $43,750.

    The discount is going to be amortized straight-line as an addition to interest expense, over 10 years.

    So, 43750/10 = $4,375 amortization per year.

    In total, there'll be interest expense of: $4,375 + $28,000 = 32,375

    FAR (5/07/13): 96

    #409038
    Futile
    Member

    Bond sold at 87.5, a discount.

    JE for issuance:

    DR Cash (87.5% x $350,000) $306,250

    CR Bonds payable (face) $350,000

    CR Discount on B/P (difference) $43,750

    Interest cash payment = [(Stated rate) / (Payments per year)] x (Face amount).

    Interest is on the straight-line method, which means Amortization per payment = (Discount or Premium) / (No. of semiannual payments).

    JE for first interest payment:

    DR Interest expense (sum) $16,187.50

    CR Cash / Payable (8% / 2 x $350,000) $14,000.00

    CR Discount of B/P ($43,750 / 20) $2,187.50

    Total interest over life when straight-line amortization is used = (Semiannual interest expense) x (No. of semiannual periods), OR = (Stated rate x Face x Life) + Discount or – Premium

    = $16,187.50 x 20 = $323,750

    = 8% x $350,000 x 10 + $43,750 = $323,750

    CPA exam: Done!

    Thank You, Lord.

    #409039
    iampei
    Member

    I totally forgot. you don't divide $350,000/20 for the interest. you multiply $350,000 by the stated rate of 4% (due to semi annual payments.

    therefore it should be $14000 + $2187.5 = $16187.5

    $16187.5 x 2 = $32375.

    #409040
    Anonymous
    Inactive

    futile I am following you, great explanation, but just to make sure I understand right, that should be a debit to bond discount for the initial recording of the bond right? otherwise the entry isn't balancing…

    #409041
    glql372805
    Member

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