Question

LeMond Inc issues a 5-year, $800,000, 6% bond to yield 5% for $835,008 and incurred $22,000 of bond issuance costs. The bond pays interest twice per year. How much interest expense will LeMond incur over the life of the bond?

Correct Answer: $204,992 How do you get this answer?

Answer 1

To issue this question, we need to prepare Bond Premium Amortization Table at Yield Rate given in the question i.e. 5%.

Semiannual Interest expenses = Carrying Value of the Bonds x Semi Annual Yield Rate

Premium on Bonds Payable = Issue Price of the bonds - Par Value = 835,008 - 800,000 = $35,008

Here is the Amortization Table

Schedule of Amortization of Bond PREMIUM (Effective Rate Method)
Payment intervals	Interest Expenses (Book Value of Bonds x Effective Interest Rate 4.5%*1/2)	Cash Interest (Par Value of the bonds 800,000 x Coupon Rate 6%*1/2)	Premium Amortization (Interest Expenses - Cash Interest)	Balance of Unamortized Premium on Bonds Payable	Par Value of Bonds Payable	Book Value (Par Value + Balance of Unamortized Bond Premium)
0				$35,008	$800,000	$835,008
1	$20,875	$24,000	$3,125	$31,883	$800,000	$831,883
2	$20,797	$24,000	$3,203	$28,680	$800,000	$828,680
3	$20,717	$24,000	$3,283	$25,397	$800,000	$825,397
4	$20,635	$24,000	$3,365	$22,032	$800,000	$822,032
5	$20,551	$24,000	$3,449	$18,583	$800,000	$818,583
6	$20,465	$24,000	$3,535	$15,048	$800,000	$815,048
7	$20,376	$24,000	$3,624	$11,424	$800,000	$811,424
8	$20,286	$24,000	$3,714	$7,709	$800,000	$807,709
9	$20,193	$24,000	$3,807	$3,902	$800,000	$803,902
10	$20,098	$24,000	$3,902	($0)	$800,000	$800,000
	$204,992

The Total Interest Expenses over the life of the bond = $204,992

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you