Question

Testbank Multiple Choice Question 71

A company issues $25800000, 9.8%, 20-year bonds to yield 10% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $25357304. Using effective-interest amortization, how much interest expense will be recognized in 2020?

$2535914

$2528400

$2535707

$1264200

Testbank Multiple Choice Question 72

A company issues $24950000, 6.6%, 20-year bonds to yield 7% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $23884381. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet? (Round answer to 0 decimal place, e.g. 52.)

$23925632

$23896982

$23910029

$24950000

Answer 1

71. Answer: $2535914

Calculations:

Date	Cash interest	Interest expense	Discount amortized	Carrying value
1/1/2020				$25,357,304
6/30/2020	$1,264,200	$1,267,865.20	$3,665	$25,360,969
12/31/2020	$1,264,200	$1,268,048.46	$1,268,048	$1,268,048
Total		$2,535,914

• Cash interest = $25800000 x 9.8% x 6/12 = $1,264,200
• Interest expense = Preceding carrying value x 10% x 6/12
• Discount amortized = Interest expense - Cash interest
• Carrying value = Preceding carrying value + Discount amortized

72. Answer: $23,910,029

Calculations:

Date	Cash interest	Interest expense	Discount amortized	Carrying value
1/1/2020				$23,884,381
6/30/2020	$823,350	$835,953.34	$12,603	$23,896,984
12/31/2020	$823,350	$836,394.45	$13,044	$23,910,029

• Cash interest = $24950000x 6.6% x 6/12 = $823,350
• Interest expense = Preceding carrying value x 7% x 6/12
• Discount amortized = Interest expense - Cash interest
• Carrying value = Preceding carrying value + Discount amortized