Question

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware issued $32,000,000 of five-year, 13% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Compute the following:

1. The amount of cash proceeds from the sale of the bonds. Round your answer to the nearest dollar.

   $  

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

   $  

3. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round your answer to the nearest dollar.

   $  

4. The amount of the bond interest expense for the first year. Round your answer to the nearest dollar.

Answer 1

Correct Answer:

Cash proceeds from bond = $ 35,706,433

Semi-Annually		Formula Applied
Face Value of Bond	$                   32,000,000
Interest Semi-Annually @ 13%/2	$                      2,080,000	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate r = ( 10%/2)	0.0500	10%
Time Period (n) 5 years * 2	10.00	5
Present Value of Face Value of Bond	$                   1,9,645,224	Face Value/(1+r%)^2n
Present Value of Interest payment	$                   1,6,061,209	Interest * ((1-(1+r)^-n)/r)
Cash proceeds from the bond issue	$                   3,5,706,433	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                      3,706,433	Issue Price - Face Value of Bonds

  

Requirement b:

The amount of premium to be amortized for the first semi-annual interest payment period:   $ 2,94,678

Requirement c:

The amount of premium to be amortized for the Second semi-annual interest payment period: $ 3,09,412

Requirement d:

The amount of bond interest expense for the first year: $ 35,55,909

Working: for a, b, c:

Effective Interest Amortization Table
Formula Used	(32,000,000*13%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (10%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
	Changes during the bond
Date	cash paid	Interest Expense	(Premium)/Discount Amortized	Carrying value of Bond
Year beginning		-	-	$ 3,57,06,433
1st interest payment	$    20,80,000	$     17,85,322	$     (2,94,678)	$ 3,54,11,754
2nd Interest payment	$    20,80,000	$     17,70,588	$     (3,09,412)	$ 3,51,02,342

End of Answer.

Thanks