3 What amount of bond interest expense is recorded on the fi

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

bond interest expense:  

Garcia Company issues 10.50%, 15-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 14.50%, which implies a selling price of 75 1/2. The effective interest method is used ?o allocate interest expense. 1. Using the implied selling price of 75 1/2, what are the issuer\'s cash proceeds from issuance of these bonds. Cash proceeds 2. What total amount of bond interest expense will be recognized over the life of these bonds? Total Bond Interest Expense Over Life of Bonds: Amount repaid payments of Par value at maturity Total repayments Less amount borrowed (from part 1) Total bond interest expense

Solution

Req 1: par value of Bonds 250000 Issue price 75.5 Amount receivevd on bonds issue 188750 ($ 250000 *75.50 /100) Req 2: Amount repaid 30 payments of $ 13125 393750 Par value of maturity 250000 Total repayments 643750 Less: Amount borrowed 188750 Total Bond interest expense 455000 Req 3: Bond Interest expense on First payment: Carrying value of bonds 188750 Market rate of interest 14.50% Interest expense for first Semi Annual payment 13684.38 (188750*14.50% *6/12)