On January 1 2016 Eagle Inc issued 400000 of bonds at an iss

On January 1, 2016, Eagle Inc. issued $400,000 of bonds at an issue price of $390,000. The bonds mature in 5 years, have a stated interest rate of 4%, and pay interest semi annually on June 30 and December 31 of each year. How much cash will be paid at each semiannual interest payment?$ How much of the discount will be amortized at each interest payment date? $ How much interest expense will be recognized at each interest payment date? $ What will be the total interest paid over the life of the bond? $

Solution

Face value of Bonds issued = $ 4,00,000

Less: Issued price = $ 3,90,000

---------------

Discount on issue of Bonds $ 10,000

============

Note : Discount on issue of bonds should be amortised over a period of redemtion period and it should be charged to p&l a/c along with interest as INTEREST EXPENSE

===============================================================================

a) Interest to be paid at each Semiannual Period :

Interest = Principal * Rate of Interest * 6 / 12 Months

= 4,00,000 * 4% * 6/12

= $ 8,000 semi annually

----------------------------------------------------------------------------------------------------

b) Amortisation of Discount at each Interest payment date:

Total amount to be Amortised = $ 10,000

redemption period = 5 years

amortization of discount per annum = $ 10,000/5Years

= 2,000 per annum

Therefore amortization of duscount at each interest payment date = 2,000 p.a / 2

= $ 1,000 semi annually

---------------------------------------------------------------------------------------------------------------------------------------

(c) Interest expense will be recognised at each interest payment date :

i. interest = $ 8,000

ii. amortistion of discount = $ 1,000

therefore Interest expense ( i+ii) = $ 9,000

------------------------------------------------------------------------------------------------------------------------------

(d) Total interest to be paid over the period of bonds :

interest payable per annum = $ 8,000 * 2 = 16,000 per annum

Therefore total interest = $ 16,000 * 5 years = 80,000 $