Question
In: Accounting
On January 1, 2016, Learned, Inc., issued $70 million face amount of 20-year, 14% stated rate...
On January 1, 2016, Learned, Inc., issued $70 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2035. Assuming Learned, Inc. uses the effective (compound) interest method, what would be the total interest expense for 2016? Hint: you will need to calculate interest expense as of June 30, 2016 and then December 31, 2016 to determine the total interest expense for the year. Be sure to round your answer to the nearest dollar.
Solutions
Expert Solution
| Proceeds of the bond = 70000000/1.08^40+70000000*7%*(1.08^40-1)/(0.08*1.08^40) = | $ 6,16,52,771 | |
| 1) | Interest for the HYE 30th June, 2016 = 61652771*8% = | $ 49,32,222 |
| Interest paid = 70000000*7% = | $ 49,00,000 | |
| Discount amortized | $ 32,222 | |
| 2) | Carrying value of the second half of 2016 = 61652772+32222 = | $ 6,16,84,992 |
| Interest for the second half of 2016 on 61684992 at 8% = | $ 49,34,799 | |
| 3) | Total interest expense for 2016 | $ 98,67,021 |
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