Question

Compute bond proceeds, amortizing premium by interest method, and interest expense

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware issued $30,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Compute the following:

The amount of cash proceeds from the sale of the bonds. Round your answer to the nearest dollar.

$  

The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round your answer to the nearest dollar.

$  

The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round your answer to the nearest dollar.

$  

The amount of the bond interest expense for the first year. Round your answer to the nearest dollar.

$  

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	10
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.61391	$30,000,000.00	$18,417,300
Interest (Annuity)	7.72173	$1,800,000.00	$13,899,114
Price of bonds			$32,316,414

Solution 2&3:

Bond Amortization Schedule
Period	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
Jan 1, Year 1				$2,316,414	$32,316,414
Jun 30, Year 1	$1,800,000	$1,615,821	$184,179	$2,132,235	$32,132,235
Dec 31, Year 1	$1,800,000	$1,606,612	$193,388	$1,938,846	$31,938,846

The amount of premium to be amortized for the first semiannual interest payment period = $184,179

The amount of premium to be amortized for the second semiannual interest payment period = $193,388

Solution 4:

The amount of the bond interest expense for the first year = $1,615,821 + $1,606,612 = $3,222,433