Question

Torrs corporation issued 10,000,000, 6.5 Percent bonds dated April 1,2018. The market rate of interest was 7 percent with interest paid each March 31. The bonds mature In three years on March 31st,2021. Tors fiscal year ends on December 31.

1. What was the issue price of these bonds

2. Compute the bonds interest expense for fiscal year 2018. The company uses the effective interest method of amortization

3. Show how the bonds should be reported on the statement kf financial position at December 31,2018

4. What amount of interest expense will be recorded on March 31,2019. Is this amount different of cash that is paid?

Please show work so I can understand.

Thank you

Answer 1

Answer 1.

Face Value of Bonds = $10,000,000

Annual Coupon Rate = 6.50%
Annual Coupon = 6.50% * $10,000,000
Annual Coupon = $650,000

Time to Maturity = 3 years
Annual Interest Rate = 7%

Issue Value of Bonds = $650,000/1.07 + $650,000/1.07^2 + $650,000/1.07^3 + $10,000,000/1.07^3
Issue Value of Bonds = $9,868,784

Answer 2.

2018:

Interest Expense = Carrying Value * Interest Rate * Period
Interest Expense = $9,868,784 * 7% * 9/12
Interest Expense = $360,611

Answer 3.

Interest Payable = $650,000 * 9/12
Interest Payable = $487,500

Amortization of Discount = Interest Payable - Interest Expense
Amortization of Discount = $487,500 - $360,611
Amortization of Discount = $126,889

Carrying Value of Bonds Payable = $9,868,784 + $126,889
Carrying Value of Bonds Payable = $9,995,673

Interest payable of $487,500 will be reported in balance sheet as current liabilities. Bonds payable of $9,995,673 will be reported in long-term liabilities. Interest expense of $360,611 will be reported in income statement.

Answer 4.

2019:

Interest Expense = Carrying Value * Interest Rate * Period
Interest Expense = $9,868,784 * 7% * 3/12
Interest Expense = $172,704

Yes, cash paid for interest is $650,000 which includes interest expense and amortization of discount on bonds payable.