The Alberto Company using the straight line method?

Question

Alberto Company issues 8%, 10-year bonds with a par value of $350,000 and semiannual interest

payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling

price of 871⁄2. 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?

Answer 1

I'm not sure what the selling price is up there....87 1/2? If the market rate is 10%, that means the selling price is 800 (80/.01)??

I'll use 800, but in any case if that's wrong you can substitute your selling price in for 800 in the following equations:

1. 350 * 800 = 280,000

2. 80*10*350 = 280,000

3. 350*40 = 14,000

Answer 2

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

$350,000 x 87.5% = $306,250

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

Total inflow $306,250

Total outflow ($28,000 x 10) + $350,000 = 630,000

Total interest expense recognised = the difference, i.e. $323,750

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

$14,000 + $2,187.50 = $16,187.50