Aggie Construction Company issued $200,000 of 9.5%, 5-year bonds on January 1, 2
ID: 2450937 • Letter: A
Question
Aggie Construction Company issued $200,000 of 9.5%, 5-year bonds on January 1, 2012. Interest is to be paid semi-annually on June 30 and December 31. The market rate at the time of the bond issue was 10%; consequently the bonds were issued for $196,000. What is the total amount of interest expense that Aggie Construction will record over the five-year life of the bond inssue? (Please note: selling price of $196,000 has been rounded somewhat to make the calculations "less messy")
$98,000
$99,000
$100,000
$295,000
none of the above
Refer to the informaiton above pertaining to Aggie Construction Company. What amount will Aggie Company report as interest expense on the bonds for the first six months of 2012?
$9,310
$9,800
$9,900
$10,000
none of the above
Refer to the information above pertaining to Aggie Construction Company. What amount will Aggie Company report as the net liability for these bonds (that is, what is the bonds' carrying value) as of December 31, 2012?
$196,000
$196,300
$196,615
$200,000
none of the above
a.$98,000
b.$99,000
c.$100,000
d.$295,000
e.none of the above
Explanation / Answer
Interest Expenses = Cash payment of interest at coupon rate + Discount on issue of bond
Amount of interest expense that Aggie construction will record over the 5 years of bond in issue will be = $95000 + $4000 =$99000
Thus answer will be (b)$99000
Interest Expense for first six months = $196000 x 10% x 0.50
= $9800
Thus,answer will be (b) $9800
Reference to the table below gives the answer 196615
Thus answer will be (c) $196615
Workin notes
Statement of amortization of loan
Date Coupon interest Interest expenses (Mkt. Rate( Amortization of bond discount Balance in bond discount account Balance in Account Bond payable Book valu of bond Jan 1,2012 $4000 $200000 $196000 June 30,2012 9500 9800 300 3700 200000 196300 de 31,2012 9500 9815 315 3385 200000 196615 june 30.2013 9500 9831 331 3054 200000 196946 dec 31,2013 9500 9847 347 2707 200000 197293 june30,2014 9500 9865 365 2342 200000 197658 dec 31,2014 9500 9883 383 1959 200000 198041 june 30,2015 9500 9902 402 1557 200000 198443 dec 31,2015 9500 9922 422 1135 200000 198865 june 30,2016 9500 9943 443 692 200000 199308 dec 31,2016 9500 10192 692 0 200000 200000 Total 95000 99000 40000