Question

Garcia Company issues 10%, 15-year bonds with a par value of $230,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117 14, The effective interest method is used to allocate interest expense. 1. Using the implied selling price of 117 14, 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 3. What amount of bond interest expense is recorded on the first interest payment date? Bond interest expense

Answer 1

1) Cash proceeds = 230000*117.25 = 269675

2) Calculate bond interest expense

Amount repaid
30 payment of 11500	345000
Par value of maturity	230000
Total repayment	575000
Less: Amount borrowed	-269675
Total bond interest expense	305325

3) Bond interest expense = 269675*4% = 10787