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# Corporation issues

### Resolved Question:

1) A corporation issues \$100,000, 8%, 5-year bonds on January 1, 2007, for \$104,200. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2007, is?

2) On January 1, 2007, the Kings Corporation issued 10% bonds with a face value of \$100,000. The bonds are sold for \$96,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2011. Kings records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2007, is?

3). When the market rate of interest was 11%, Welch Corporation issued \$100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be?

Submitted: 7 years ago.
Category: Finance
Expert:  Annie Kavitha replied 7 years ago.
• 1) A corporation issues \$100,000, 8%, 5-year bonds on January 1, 2007, for \$104,200. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2007, is?

Par value of Bonds 100,000

Issue price of Bonds 104,200

No. of years = 5

No. of periods= 5x2 = 10 periods

Amortization of Bond premium per period = 4,200/10 = 420 per period

Interest payable = 100,000 x 8% x ½ = 4,000

Interest expense = 4,000 - 420 = 3,580

2) On January 1, 2007, the Kings Corporation issued 10% bonds with a face value of \$100,000. The bonds are sold for \$96,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2011. Kings records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2007, is?

Par value of Bonds 100,000

Issue price of Bonds 96,000

Discount on issue 4,000

No. of years = 5

No. of periods= 5x2 = 10 periods

Amortization of Bond discount per period = 4,000/10 = 400 per period

Interest payable = 100,000 x 10% x ½ = 5,000

Interest expense = 5,000 + 400 = 5,400

3). When the market rate of interest was 11%, Welch Corporation issued \$100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be?

Bonds are issued at Face value. Thus no discount or premium is realized on issue and therefore no amortization of bond discount or premium.

Annie Kavitha, Lecturer
Category: Finance
Satisfied Customers: 1023
Experience: M.Com
Customer: replied 7 years ago.

You got one right but the other two wrong.

Q2 Possible answers \$9,200 or \$9,800, or \$10,400, or \$10,800 (you said "\$5400").

Q3 Possible answers. \$4,000 or \$896, or \$17,926, or \$1,793 (You answered "No discount").

The answer you give me needs to match one of those numbers. I didn’t want to include the possible answers in the original mail, in case someone just guessed as I would not be able to tell if they were right or not).

Expert:  Annie Kavitha replied 7 years ago.

2) On January 1, 2007, the Kings Corporation issued 10% bonds with a face value of \$100,000. The bonds are sold for \$96,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2011. Kings records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2007, is?

Par value of Bonds 100,000

Issue price of Bonds 96,000

Discount on issue 4,000

No. of years = 5

No. of periods= 5x2 = 10 periods

Amortization of Bond discount per period = 4,000/10 = 400 per period

Interest payable = 100,000 x 10% x ½ = 5,000

Interest expense = 5,000 + 400 = 5,400 per period.

Interest expense for the year ended December 31, 2007 (June 30 + December 31) = 5,400 + 5,400 = 10,800.

3). When the market rate of interest was 11%, Welch Corporation issued \$100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be?

Bonds are issued at Face value. Thus no discount or premium is realized on issue and therefore no amortization of bond discount or premium.

Thus interest expense for 1 period = 100,000 x 8% x 1/2 = 4,000

Annie Kavitha, Lecturer
Category: Finance
Satisfied Customers: 1023
Experience: M.Com

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