Question

A company issues $10,000,000, 7.8%, 20-year bonds when the market rate of interest for the bonds is 8%. The bonds were issued on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will the company recognize in 2014

Answer 1

Answer:

$784,249.08

Explanation:

The interest expense the company would recognize in the year is the sum of the interest expenses for both June and December as computed below:

Interest expense for June=$9,802,072*8%*6/12=$392,082.88  

June coupon payment=$10,000,000*7.8%*6/12=$390000

June bond balance=cash proceeds+Interest expense for June-June coupon payment

June bond balance=$9,802,072+$392,082.88  -$390000

June bond balance=$9,804,154.88  

December interest expense=$9,804,154.88*8%*6/12=$392,166.20

Interest expense for 2014= $392,082.88+$392,166.20  

Interest expense for 2014==$784,249.08