Question

The company had the following transactions related to three bond issues:

• Issued $1,000,000 ten-year bonds (Bond A) at face value. The interest rate on the bonds is 5%.
• Issued $2,000,000 ten-year bonds (Bond B) when the price was 98. The interest rate on the bonds is 5%.
• Issued $3,000,000 ten-year bonds (Bond C) when the price was 102.50. The interest rate on the bonds was 5%.

For each bond, calculate the following:

What were the proceeds when the bond was issued?

What is the amount of cash paid when the interest is paid?

What is the total interest expense when the interest is paid?

	Bond A	Bond B	Bond C
Proceeds From Bond Issue
Cash Paid on Interest Date
Total Interest Expense on Interest Date

Answer 1

Bond A

Proceeds form bond issue = $1,000,000

Cash paid on interest date = Par value of bonds x Interest rate

= 1,000,000 x 5%

= $50,000

Total interest expense on interest date = Cash paid on interest date

= $50,000

Bond B

Par value of bonds = $2,000,000

Issue price = 98

Proceeds form bond issue = Par value of bonds x Issue price

= 2,000,000 x 98%

= $1,960,000

Cash paid on interest date = Par value of bonds x Interest rate

= 2,000,000 x 5%

= $100,000

Discount on bonds payable = Par value of bonds- Proceeds form bond issue

= 2,000,000-1,960,000

= $40,000

Annual amortization of bond discount = Discount on bonds payable/ Bond life

= 40,000/10

= $4,000

Total interest expense on interest date = Cash paid on interest date + Annual amortization of bond discount

= 100,000+4,000

= $104,000

Bond C

Par value of bonds = $3,000,000

Issue price = 102.50

Proceeds form bond issue = Par value of bonds x Issue price

= 3,000,000 x 102.5%

= $3,075,000

Premium on issue of bonds = Proceeds form bond issue- Par value of bonds

= 3,075,000-3,000,000

= $75,000

Cash paid on interest date = Par value of bonds x Interest rate

= 3,000,000 x 5%

= $150,000

Annual amortization of bond premium= Premium on issue of bonds/ Bond life

= 75,000/10

= $7,500

Total interest expense on interest date = Cash paid on interest date - Annual amortization of bond premium

= 150,000-7,500

= $142,500

	Bond A	Bond B	Bond C
Proceeds From Bond Issue	$1,000,000	$1,960,000	$3,075,000
Cash Paid on Interest Date	$50,000	$100,000	$150,000
Total Interest Expense on Interest Date	$50,000	$104,000	$142,500