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InterTech Corporation needed financing to build a new manufacturing plant. On June 30, 2017, InterTech issued $4,350,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30th). The effective interest rate was 8%.

What amount in interest expense did InterTech record for the December 31, 2017 payment?

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Karabo99

Answer:

The interest expense did InterTech record for the December 31, 2017 payment is $153725

Explanation:

Present value redumption value =$4,350,000 *pvif (@4%, 16year)

                                                      = 4350000*0.5339

                                                      = $2322,501

Present value of Interest  = $130,500 *pvifa (@4%, 16year)

                                         = $130,500 *11.6522

                                         = $1520,625

Present value of bond = Present value redumption value + Present value of Interest

                                      = $2322,501 + $1520,625

                                      = $3,843,125

Interest expense recorded on December 31, 2017  = $3,843,125*8%*1/2

                                                                                   = $153725

Therefore, the interest expense did InterTech record for the December 31, 2017 payment is $153725

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