Garcia Company issues 850 15year bonds with a par value of 3

Garcia Company issues 8.50%, 15-year bonds with a par value of $390,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 12.50%, which implies a selling price of 79. The effective interest method is used to allocate interest expense.

1. Using the implied selling price of 79, what are the issuer\'s cash proceeds from issuance of these bonds.

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: 30payments of $16,575 = $497250

Par value at maturity 887,250

Total repayments1,384,500

Less amount borrowed (from part 1): ???

Total bond interest expense: $1,384,500

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

Bond interest expense:???

Cash proceeds

$308,100

Solution

1 Cash proceeds = 390000*0.79= $308100 2 Amount repaid: 30payments of $16,575 497250 Par value at maturity 390000 Total repayments 887250 Less amount borrowed 308100 Total bond interest expense 579150 3 Bond interest expense = 308100*12.5%/2= $19256