Question

InterTech Corporation needed financing to build a new manufacturing plant. On June 30, 2017, InterTech issued $4,350,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30th). The effective interest rate was 8%.

What amount in interest expense did InterTech record for the June 30, 2018 payment?

Answer 1

Interest expense to be recorded on June 30, 2018 = $154,654

Bond will be issued at discount so some part of interest will have parts of Discount on bond.

Working

Bonds issue price is calculated by ADDING the:
Discounted face value of bonds payable at market rate of interest, and
Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Annual Rate	Applicable rate		Face Value	$         4,350,000.00
Market Rate	8%	4%		Term (in years)	8
Coupon Rate	6%	3%		Total no. of interest payments	16

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$   4,350,000.00	at	4.0%	Interest rate for	16	term payments
PV of $1	0.533908176
PV of	$   4,350,000.00	=	$           4,350,000.00	x	0.533908176	=	$    2,322,500.56	A
Interest payable per term	at	3.0%	on	$ 4,350,000.00
Interest payable per term	$       130,500.00
PVAF of 1$	for	4.0%	Interest rate for	16	term payments
PVAF of 1$	11.65229561
PV of Interest payments	=	$             130,500.00	x	11.65229561	=		$    1,520,624.58	B
				Bond Value (A+B)			$    3,843,125.14

Calculation of Interest expense on June 30,2018

	Period	Cash payment	Interest expense	Discount on Bonds payable	Carrying Value of Bond
	Issued			$                   506,875	$      3,843,125
Year 1	Dec-17	$                     130,500	$           153,725	$                     23,225	$      3,866,350
Year 2	30-Jun-18	$                     130,500	$           154,654	$                     24,154	$      3,890,504
	31-Dec-18	$                     130,500	$           155,620	$                     25,120	$      3,915,624