Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued $35,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. Compute the following, presenting figures used in your computations.

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 4 and 5. Round to the nearest dollar.

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

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

d. The amount of the bond interest expense for the first year.


Answer:

a. Present value of $1 for 10 semiannual
periods at 5% semiannual rate……………………… 0.61391
Face amount of bonds……………………………………
Present value of an annuity of $1 for 10
× $35,000,000 $21,486,850
semiannual periods at 5% semiannual rate………… 7.72173
Semiannual interest payment…………………………… × $ 2,100,000 16,215,633
Proceeds of bond sale…………………………………… $37,702,483
b. First semiannual interest payment…………………… $ 2,100,000
5% of carrying amount of $37,702,483………………… 1,885,124
Premium amortized………………………………………… $ 214,876
c. Second semiannual interest payment………………… $ 2,100,000
5% of carrying amount of $37,487,607*………………… 1,874,380
Premium amortized………………………………………… $ 225,620
* $37,702,483 – $214,876
d. Annual interest paid……………………………………… $ 4,200,000
Less premium amortized*………………………………… 440,495
Interest expense for first year…………………………… $ 3,759,505
* $214,876 + $225,620