Question

On June 30, 2017, Novak Company issued $4,400,000 face value of 13%, 20-year bonds at $4,731,010, a yield of 12%. Novak uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

(1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.)

(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used

(3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.)

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

Answer 1

Par Value of bonds					4400000
Semi annual cash interst (4400000*13%*6/12)					286000
Amort Chart:
Date	Cash Int	Int exp	Premium	Unamortized	Balance
			Amortize	Premium
30.06.17				331010	4731010
31.12.17	286000	283861	2139	328871	4728871
30.06.18	286000	283732	2268	326603	4726603
31.12.18	286000	283596	2404	324199	4724199
Req 1.
Total Interest expense for 2018:
30.06.18		283732
31.12.18		283596
Total expense		567328
Req 2.
Straight line Amort:
Cash interest (286000*2)			572000
Less: Premium amortized			16550.5
(331010/40*2)
Total Expense			555449.5
Interest expense will be lesser when straight line method is used.
Req 3.
Total cost of Borrowings:
40 payments of $ 286000			11440000
Par value of bonds			4400000
Total repayments			15840000
Less: Amount borrowed			4731010
Total Interest expenses			11108990
Req 4.
The total cost of borrwoing will be same for straight line method as well.