Question

Enviro Company issues 6.00%, 10-year bonds with a par value of $340,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 3.00%, which implies a selling price of 125.625. The straight-line method is used to allocate interest expense. 1. Using the implied selling price of 125.625. 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? 3. What is the amount of bond interest expense recorded on the first interest payment date? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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

1.

Par value of bonds = $340,000

Selling price = 125.625

Issue price of bonds = 340,000 x 125.625%

= $427,125

2.

Semi annual interest payment = 340,000 x 6% x 6/12

= $10,200

Total bond interest expense over the life of the bonds

Amount repaid
20 payments of $10,200	204,000
Par value at maturity	340,000
Total repayments	544,000
Less amount borrowed (from part 1)	- 427,125
Total bond interest expense	$116,875

3.

Premium on bonds payable = Issue price of bonds - Par value of bonds

= $427,125 - $340,000

= $87,125

Semi annual bond premium amortization = Premium on bonds payable/Number of semi annual interest payments

= 87,125/20

= $4,356

Semi annual interest payment = 340,000 x 6% x 6/12

= $10,200

Bond interest expense to be recorded on the first interest payment date = Semi annual interest payment - Semi annual bond premium amortization

= 10,200 - 4,356

= $5,844

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