Question

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Apple Company issued five-year 7% bonds with a face value of $100,000, for $96,567.94 on January...

Apple Company issued five-year 7% bonds with a face value of $100,000, for $96,567.94 on January 1, Year 1 when the market (effective) rate of interest was 7.5%. The bonds pay annual interest each December 31. Stanton uses the effective interest method for amortization of premium or discount on bonds payable. Round your answers to two decimal places.

Required:

a) What is the annual amount of cash that Stanton will pay to bondholders for interest?

b) What amount of interest expense and discount amortization should Stanton recognize for Year 1? What is the carrying amount of the liability on December 31, Year 1?

c) What amount of interest expense and premium amortization should Stanton recognize for Year 2? What is the carrying amount of the liability on December 31, Year 2?

d) What is the total amount of interest that Stanton will record in interest expense over the life of the bond?

Expert Solution

Answer to Requirement a:

Face Value of Bonds = $100,000
Annual Coupon Rate = 7.00%

Annual Coupon = Face Value of Bonds * Annual Coupon Rate
Annual Coupon = $100,000 * 7.00%
Annual Coupon = $7,000

So, Stanton will pay annual interest of $7,000 to bondholders.

Answer to Requirement b:

Beginning Carrying Value of Bonds = $96,567.94

Annual Interest Rate = 7.50%

Interest Expense = Beginning Carrying Value of Bonds * Annual Interest Rate
Interest Expense = $96,567.94 * 7.50%
Interest Expense = $7,242.60

Amortization of Discount = Interest Expense - Coupon Payment
Amortization of Discount = $7,242.60 - $7,000.00
Amortization of Discount = $242.60

Answer to Requirement c:

Beginning Carrying Value of Bonds = $96,567.94 + $242.60
Beginning Carrying Value of Bonds = $96,810.54

Annual Interest Rate = 7.50%

Interest Expense = Beginning Carrying Value of Bonds * Annual Interest Rate
Interest Expense = $96,810.54 * 7.50%
Interest Expense = $7,260.79

Amortization of Discount = Interest Expense - Coupon Payment
Amortization of Discount = $7,260.79 - $7,000.00
Amortization of Discount = $260.79

Answer to Requirement d:

Total Amount Paid = Annual Coupon * Number of Coupon Payments + Maturity Value of Bonds
Total Amount Paid = $7,000 * 5 + $100,000
Total Amount Paid = $135,000

Total Interest Paid = Total Amount Paid - Issue Value of Bonds
Total Interest Paid = $135,000 - $96,567.94
Total Interest Paid = $38,432.06

ekkarill92 answered 2 years ago

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