Question
In: Accounting
On January 1, 2021, Lyle's Limeade issues 3%, 20-year bonds with a face amount of $86,000...
On January 1, 2021, Lyle's Limeade issues 3%, 20-year bonds with a face amount of $86,000 for $74,237, priced to yield 4%. Interest is paid semiannually.
What amount of interest expense will be recorded in the December
31, 2021, annual income statement? (Do not round your
intermediate calculations. Round your final answer to nearest whole
dollar amount.)
Solutions
Expert Solution
Issue Price of the bond is nothing but present value of periodic interest payments & redemption amount.
In this case market rate of interest is 4% per annum. That is used for discounting the cash flows. Coupon Rate is 3% per annum.
Bond is issued for $74,237
Interest is paid semiannualy in this case.
Interest expense is accounted based on market interest rate (2% per half year) (Discounting rate) while interest is paid based on coupon rate (1.5% per half year). Difference is adjusted in Premium/Disount on issue of Bond.
Thus total interest expense for the Year 2021 shall be as under:
(Amount in $)
| Half Year ended on | Opening Value | Interest Exp @ 2% | Interest Paid @ 1.5% | Closing Value |
| 30-06-2021 | 74,237 | 1,485 | 1,290 | 74,432 |
| 31-12-2021 | 74,432 | 1,489 | 1,290 | 74,630 |
Total Interest Expense for Year ended on 31st Dec, 2021 ($) = 1485 + 1489 = $2,973
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