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

On January 1, 2016, Tover 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

How much cash will be paid at each semiannual interest payment? Interest Paid = $400,000 x 4% x 1/2 $        8,000 How much of the discount will be amortized at each interest payment date? Discount amortized = (400000-390000)÷ (5 Yrs x 2) $1,000 per half year How much interest expense will be recognized at each interest payment date? Interest expense = 8000+1000 = $9000 per period What will be the total interest paid over the life of the bond? Total interest paid = 8000 x 10 = $80000 Note: question is asking for total interest paid, so solution is calculated assuming only cash interest paid, otherwise total interest expense will be $9000 x10 = $90000