Question

Compute Bond Proceeds, Amortizing Discount by Interest Method, and Interest Expense

Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued $40,000,000 of five-year, 10% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following:

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 5 and Exhibit 7. Round to the nearest dollar.
$

b. The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.
$

c. The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.
$

d. The amount of the bond interest expense for the first year. Round to the nearest dollar.
$

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	10
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.55839	$40,000,000.00	$22,335,600
Interest (Annuity)	7.36009	$2,000,000.00	$14,720,180
Amount of cash proceeds from the sale of the bonds.			$37,055,780

Solution b:

Bond Amortization Schedule
Semiannual period	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
0				$2,944,220	$37,055,780
1	$2,000,000	$2,223,347	$223,347	$2,720,873	$37,279,127
2	$2,000,000	$2,236,748	$236,748	$2,484,126	$37,515,874

Refer above amortization table,

The amount of discount to be amortized for the first semiannual interest payment period, using the interest method = $223,347

Solution c:

The amount of discount to be amortized for the second semiannual interest payment period, using the interest method = $236,748

Solution d:

The amount of the bond interest expense for the first year = $2,223,347 + $2,236,748 = $4,460,095