Question

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

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued $90,000,000 of five-year, 12% bonds at a market

(effective) interest rate of 10%, 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 8 and Exhibit 10. Round to the nearest dollar.

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

C. The amount of premium 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

Answer:

Part 1	Amount of cash proceeds from the sale of the bonds	$ 96,949,242
Part 2	Amount of premium to be amortized for the first semiannual interest payment period	$        552,538
Part 3	Amount of premium to be amortized for the second semiannual interest payment period	$        580,165
Part 4	Amount of the bond interest expense for the first year	$    9,667,297

Calculation:

Coupon rate per Period (10%/2)	6.00%
Face value of bond	$ 90,000,000
Market rate per Period (10%/2)	5.00%
Interest paid (90000000*6%)	$    5,400,000
Interest paid on	Semi annually
Number of period (5*2)	10

Market rate per Period used for PV factor.
Market rate per Period		5.00%
Period	PV factor	PVA factor
1	0.95238	0.95238
2	0.90703	1.85941
3	0.86384	2.72325
4	0.82270	3.54595
5	0.78353	4.32948
6	0.74622	5.07569
7	0.71068	5.78637
8	0.67684	6.46321
9	0.64461	7.10782
10	0.61391	7.72173

	Amount	Multiply: PV factor	Present value
Face value	$ 90,000,000	0.61391	$      55,251,900
Interest paid	$    5,400,000	7.72173	$      41,697,342
Issue price of bonds (Total of above)			$      96,949,242
Less: face value of Bond			$      90,000,000
Premium on Bond payable			$         6,949,242

Interest payment (Credit Cash) = Face value of bond * Coupon rate

Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate

Amortization of bond premium (Debit Bond Premium) = Interest payment - Interest Expense

Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium

Credit Balance in Bond Payable = Face value of bond

Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable

Bond Premium Amortization Table
Period	Date	Interest payment (Cash paid) @ 6%	Interest Expense @ 5%	Amortization of bond premium	Credit Balance in Bond premium	Credit Balance in Bond Payable	Book (carrying) value of Bond
0					$        6,949,242	$        90,000,000	$        96,949,242
1		$        5,400,000	$        4,847,462	$        552,538	$        6,396,704	$        90,000,000	$        96,396,704
2		$        5,400,000	$        4,819,835	$        580,165	$        5,816,539	$        90,000,000	$        95,816,539

Interest expense for the first semiannual period	$        4,847,462
Interest expense for the second semiannual period	$        4,819,835
Interest expense for the first year	$        9,667,297