On January 1 of this year, Barnett Corporation sold bonds with a face value of $500,000 and a coupon rate of 7 percent. The bonds mature in 10 years and pay interest annually on December 31. Barnett uses the effective-interest amortization method. Ignore any tax effects. Each case is independent of the other cases.
Required:
Complete the following table. The interest rates provided are the annual market rate of interest on the date the bonds were issued.
Case A (17,) Case B (8%) Case C (67,)
a. Cash received at issuance
b. Interest expense recorded in Year 1
c. Cash paid for interest in Year 1
d. Cash paid at maturity for bond principal
SOLUTION
CASE A
a. Cash received at issuance (Case A): Market interest 7%
Present value:
| $500,000 x 0.50835 | = | 254,175 |
|---|---|---|
| $ 35,000* x 7.02358 | = | 245,825 |
| Issue price | = | $500,000** |
*$500,000 x .07
**Using Excel or a financial calculator results in a present value of $500,000.
b. Interest expense calculation: $500,000 x .07 = $35,000
c. Cash payment for interest: $500,000 x .07 = $35,000
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