Question

Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87½. The straight-line method is used to allocate interest expense.

1. What are the issuer’s cash proceeds from issuance of these bonds?

2. What total amount of bond interest expense will be recognized over the life of these bonds?

3. What is the amount of bond interest expense recorded on the first interest payment date?

Short answer

1. Cash proceeds from the issue of bonds are$218,750
2. The total bond interest expense is $231,250
3. The first interest expense is $11,563

Step-by-step solution

Meaning of Bonds

Bonds refer to security instruments issued by a company to raise public funds; in return, it guarantees to pay fixed interest installments

Calculation of the issuer’s cash proceeds from the issuance of the bonds

Calculation of cash proceeds

$\begin{array}{rcl}Cash proceeds on Issue of bond& =& \$250,000\times 87.5\%\\ & =& \$218,750\\ & & \end{array}$

Journal entry for the issuance of the bond

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash (refer working note)	218,750
	Discount on Bonds Payable	31,250
	Bonds Payable		250,000
	(To record the selling of bonds at a discount)

Calculation of total bond interest expense

Interest computation
Twenty payments of $10,000	$200,000
Add: Discount	31,250
Total bond interest expense	$231,250

Calculation of bond expense for the first year

$\begin{array}{rcl}\text{Bond} \text{interest} \text{expense}& =& \frac{\text{Total} \text{bond} \text{interest} \text{expense}}{\text{Number} \text{of} \text{interest} \text{periods}}\\ & =& \frac{\$231,250}{20}\\ & =& \$11,563\\ & & \end{array}$

First Interest Expense amount is $ 11,563