Ware Co. Issues Bonds
Day 1 of Fiscal Year Brings Bond Issuance
Premium Amortization and Interest Expense Calculations Detailed
Ware Co. commenced its fiscal year with a flurry of financial activity, issuing a substantial amount of bonds and initiating the amortization of bond premium and calculation of interest expense.
On the first day of the fiscal year, Ware issued $32,000,000 of five-year bonds. The bonds carry a coupon rate of 5% and were issued at a premium of 2%. This means that the bonds were sold for $32,640,000, which is $640,000 more than their face value.
Ware Co. will amortize the bond premium over the life of the bonds using the interest method. This method allocates the premium to each interest payment period. As a result, the interest expense will be slightly lower in the early years of the bond's life and slightly higher in the later years.
For the first interest payment period, Ware Co. will record interest expense of $816,000 (5% of $32,640,000). The amortization of premium for the period will be $25,600 ($640,000 premium ÷ 20 interest payment periods).
Ware Co.'s decision to issue bonds reflects its confidence in its future financial performance and its need to raise capital for ongoing operations and growth initiatives. The issuance of bonds also provides Ware Co. with a long-term source of financing at a relatively low cost.
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