Question

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 to 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

Answer 1

Face value of the Bond Less: Bond Selling price Dicount on bonds Payable 250000 188750 61250 Cash Proceeds (250000*0.7550) 188750 Total Bond interest Expenses over the life of the bond Amount Repaid : 30 Payment of $13125 Par value at Marturiy Total Repaymnet Less amount borrowed Total bond interest Expenses 393750 250000 643750 188750 455000 Bond interest Expenes for First Payment (188750*14.5%*6*/12) 13684 (or) 13684.375