sandersn sandersn sandersn sandersn A135 Debt IssuanceIntere

A13-5 Debt Issuance-Interest Expense: Sanderson Corp. issued $20,000,000 of bonds payable on 1 June 20X5. The interest at 5.5% per annum, payable semi-annually each 31 May and 30 Nove 6% per annum. year bond each 31 May and 30 November. The bonds were issued to yield Required: 1. Calculate the proceeds from issuan bond is outstanding. ce and interest expense and interest paid for the first six months that the A the original maturity date. Also ance ifthe y eld rate is 8% and the bond is issued on 1 June 20X7, still with A the original maturity date. Also calcul bond is outstanding. ate interest expense and interest paid for the first six months that the bond is issued on 30 November 209, so calculate interest expense and interest paid for the first six months 3. Calculate the proceeds from issuance if the yield rate is 4% and the still with the original maturity date. Al that the bond is outstanding. 4. Explain why interest expense is different in requirements 1 to 3, even though interest paid is identical.

Solution

1-

value of bond

coupon payment*PVAF * face value*PVF

550000*14.88 + 20000000*.554

19264000

coupon payment

20000000*2.75%

550000

face value

20000000

PVAF at 3% for 20 semiannual period

1-(1+r)^-n/r

1-(1.03)^-20 / .03

14.88

PVF at 20th semiannual period

1/(1+r)^n

1/(1.03)^20

0.554

Face value of bond

20000000

proceeds from issuance

19264000

discount on bonds payable

736000

amount of interest paid

20000000*2.25%

550000

discount amortized using effective interest rate method

577920-550000

27920

interest expense = interest paid + discount amortized

19264000*3%

577920

value of bond

coupon payment*PVAF * face value*PVF

550000*13.59 + 20000000*.456

16594500

coupon payment

20000000*2.75%

550000

face value

20000000

PVAF at 4% for 20 semiannual period

1-(1+r)^-n/r

1-(1.04)^-20 / .04

13.59

PVF at 20th semiannual period

1/(1+r)^n

1/(1.04)^20

0.456387

Face value of bond

20000000

proceeds from issuance

16594500

discount on bonds payable

3405500

amount of interest paid

20000000*2.75%

550000

discount amortized using effective interest rate method

663780-550000

113780

interest expense = interest paid + discount amortized

16594500*4%

663780

value of bond

coupon payment*PVAF * face value*PVF

550000*16.35 + 20000000*.673

22452500

coupon payment

20000000*2.75%

550000

face value

20000000

PVAF at 2% for 20 semiannual period

1-(1+r)^-n/r

1-(1.04)^-20 / .04

16.35

PVF at 20th semiannual period

1/(1+r)^n

1/(1.02)^20

0.673

Face value of bond

20000000

proceeds from issuance

22452500

premium on bonds payable

2452500

amount of interest paid

20000000*2.75%

550000

premium amortized using effective interest rate method

550000-449050

100950

interest expense = interest paid - premium amortized

22452500*2%

449050

4-

proceeds from issuance

interest paid

interest expense

case 1

19264000

550000

577920

case 2

16594500

550000

663780

case 3

22452500

550000

449050

Interest paid is identical in all the three scenarios while interest expense is different due to different market rates and due to which bonds are either issued at discount or at premium so accordingly amount of discount/premium on bonds payable are adjusted into interest expense

1-	value of bond	coupon payment*PVAF * face value*PVF		550000*14.88 + 20000000*.554	19264000
	coupon payment	20000000*2.75%	550000
	face value		20000000
	PVAF at 3% for 20 semiannual period	1-(1+r)^-n/r	1-(1.03)^-20 / .03	14.88
	PVF at 20th semiannual period	1/(1+r)^n	1/(1.03)^20	0.554
	Face value of bond		20000000
	proceeds from issuance		19264000
	discount on bonds payable		736000
	amount of interest paid	20000000*2.25%	550000
	discount amortized using effective interest rate method	577920-550000	27920
	interest expense = interest paid + discount amortized	19264000*3%	577920
	value of bond	coupon payment*PVAF * face value*PVF		550000*13.59 + 20000000*.456	16594500
	coupon payment	20000000*2.75%	550000
	face value		20000000
	PVAF at 4% for 20 semiannual period	1-(1+r)^-n/r	1-(1.04)^-20 / .04	13.59
	PVF at 20th semiannual period	1/(1+r)^n	1/(1.04)^20	0.456387
	Face value of bond		20000000
	proceeds from issuance		16594500
	discount on bonds payable		3405500
	amount of interest paid	20000000*2.75%	550000
	discount amortized using effective interest rate method	663780-550000	113780
	interest expense = interest paid + discount amortized	16594500*4%	663780
	value of bond	coupon payment*PVAF * face value*PVF	550000*16.35 + 20000000*.673	22452500
	coupon payment	20000000*2.75%	550000
	face value		20000000
	PVAF at 2% for 20 semiannual period	1-(1+r)^-n/r	1-(1.04)^-20 / .04	16.35
	PVF at 20th semiannual period	1/(1+r)^n	1/(1.02)^20	0.673
	Face value of bond		20000000
	proceeds from issuance		22452500
	premium on bonds payable		2452500
	amount of interest paid	20000000*2.75%	550000
	premium amortized using effective interest rate method	550000-449050	100950
	interest expense = interest paid - premium amortized	22452500*2%	449050
	4-	proceeds from issuance	interest paid	interest expense
	case 1	19264000	550000	577920
	case 2	16594500	550000	663780
	case 3	22452500	550000	449050
	Interest paid is identical in all the three scenarios while interest expense is different due to different market rates and due to which bonds are either issued at discount or at premium so accordingly amount of discount/premium on bonds payable are adjusted into interest expense