Question

In: Finance

Gold Enterprises recently issued $40 million of 12% coupon bonds, payable semiannually, which mature in 10...

  1. Gold Enterprises recently issued $40 million of 12% coupon bonds, payable semiannually, which mature in 10 years. The bonds were sold for $37,796,299 to yield a 13% annual rate.
  1. Use the table below to show the amortization of the discount, interest expense, and the carrying amount of the bonds from issuance till the end of Period 2. (3/.   )

Interest expense

Cash interest paid

Discount amortization

Discount balance

Bond payable, net

0

1

2

  1. Explain in your words why interest expense differs from interest paid? (1/. )

Solutions

Expert Solution

a.

Interest expense
(Bond payable *13%*1/2)
Cash interest paid
(40,000,000*12%*1/2)
Discount amortization
(Interest expense - Cash interest)
Discount balance Bond payable, net
0 2203701 37,796,299
1 2456759.435                         2,400,000                 56,759                            2,146,942                   37,853,058
2 2460448.798                         2,400,000                 60,449                            2,086,493                   37,913,507

b. Interest paid remains fixed i.e. the coupon payment is same each half year which is calculated on the face value of the bonds. While the interest expense is calculated on the bond payable balance that is at the end of the each semi annual period. The balance in bond payable increases with each interest payment and amortization of discount.


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