Question

Lowfood Corporation issued 10-year USD5,000,000 8 percent bonds on March 1, 2012, with a maturity date of March 1, 2022....


Lowfood Corporation issued 10-year USD5,000,000 8 percent bonds on March 1, 2012, with a maturity date of March 1, 2022. The bonds were sold at a 10% market rate, and the total proceeds received by Lowfood equal the market value plus accrued interest. Interest is paid on March 1st and September 1st of each year. What is the amount of interest expense that will be recognized for the year ended December 31, 2014, and b) what is the balance of unamortized discount in the balance sheet as of December 31, 2018?

Answer

The bonds are treated as a long-term liability because there are to be paid in more than a year. The bond is issued at a discount when the coupon is the interest rate that the company pays and if it is lower than what prevails in the market, the discount on bonds issued is amortized over the life of the bond.

Part 1

The computation of the present value is as follows:

Accounting homework question answer, step 2, image 1

 

The formula snip is as follows:

Accounting homework question answer, step 2, image 2

The computation of Interest expenses for 2014 is as follows:

Accounting homework question answer, step 2, image 3

 

The formula snip is as follows:

Accounting homework question answer, step 2, image 4

Therefore, the interest expense for year 2014 is $446.956.43.

Part 2

 

The computation of unamortized discount is as follows:

Accounting homework question answer, step 3, image 1

The formula snip is as follows:

Accounting homework question answer, step 3, image 2

Therefore the unamortized discount in the year 2018 is 289,318.38.

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