Question

Cola, Inc., issued a 12-year, 10%, $2,500,000 bond on January 1, 2018 dated as of January 1, 2018. The bond pays interest every June 30 and December 31, with the principal to be paid at the end of 12 years. The effective interest rate on the bond is 8%.

What is the total interest expense recognized over the life of the bonds?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer 3 # 5 5 2 B Firstly we have to calculate the issue price of the bond = (semiannual interest payment * present value annuity (24,18%/2)))+(face value / (1.04)^24) = ((2500000*5%)*((1-(1.04)^-24)/.04))+(2500000/(1.04)^24) = (125000*15.24696) +(2500000/2.563304) = 1905870 +975304 = $2881174 0 Total interest expense recognised over the life of the bond 1 = cash interest paid - premium amortised over the life of the bond 2 = (2500000*10%*12) - (2881174-2500000) 3 = 3000000 - 381174 4 = $ 2618826 6 Thus the correct answer amount of interest expense over the life of the bond = $ 2618826 8 Note 9 Premium on bond has to be amortised during the life of the bond and it will be adjusted and credited to interest expense account.