Question

QUESTION 35 On January 1, 2020 Mercy Grace Hospital issued five-year bonds with a face value of $800,000 and a stated interest rate of 12% payable semiannually on July 1 and January 1. The bonds were sold to yield 10%. Present value table factors are: Present value of 1 for 5 periods at 10% 62092 Present value of 1 for 5 periods at 12% 56743 Present value of 1 for 10 periods at 5% 61391 Present value of 1 for 10 periods at 6% 55839 Present value of an ordinary annuity of 1 for 5 periods at 10% 3.79079 Present value of an ordinary annuity of 1 for 5 periods at 12% 3.60478 Present value of an ordinary annuity of 1 for 10 periods at 5% 7.72173 Present value of an ordinary annuity of 1 for 10 periods at 6% 7.36009 Determine 1. Present value of the principal 2. Cash Interest payments semiannually 3. Present value of the Interest payments 4. Issue price of the bonds. 5. Assume that you computed issue price of the bonds to be 650,000. Compute interest expense to be recorded for the six months ended June 30, 2020 Express your answer as an integer without sign (Round all computations to the nearest dollar. For example, Input "100.000 if your answer is $100,000 22) for example, Input 100,000" if your answer is $100,000 22).

Answer 1

Solution:

1. Present value of Principal = $800,000 * 0.61391 = 491,128

because as interest is paid semiannually , period will get doubled and interest rate and yield will also cut to half.

So it will Present value of 1 for 10 periods at 5%.

2.Cash interest payments semiannually = $800,000* 12%/2 = 48,000

3.Present value of Interest payments = $48,000 * 7.72173 = 370,643

Present value of ordinary annuity of 1 for 10 periods at 5%

4.Issue price of bonds = 491,128 + 370,643 = 861,771

5.If Issue price of bond is $650,000 , and face value is $800,000 , so there is discount on issue of bonds which is $150,000, we need to amortize this discount as per straight line method , as interest is paid semiannually , period will get doubled so $150,000/10 = $15,000 per period discount is amortized.

So interest expense on june 30 2020 = 48,000+ 15,000 = 63,000

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