Brief Exercise 10.

Loan amount 10,000

Loan time period 1 year
Interest rate 8% per annum
Date of borrowing April. 1
Interest payments Quartely 3-months

Cash payment for interest expense in Y1

Interest exp per year 800

Interest exp per month 66.67
Interest exp per quarter 200
Interest exp for Y1 (3 quarters) 600

Cash payment for interest expense in Y2

Interest exp for 4th quarter (Y2) 200

Total interest exp 800

 Brief Exercise 10.2

Loan amount 500,000

Interest rate 8%
Tax rate 40%

Before income tax interest cost 40,000

Tax savings 16,000
Interest cost (net of income tax) 24,000

Effective interest rate net of income tax 4.80%

i(1-tax rate)

Applying effective interest rate 24,000

 Brief Exercise 10.3

Bonds sold 1,000,000

Bond interest rate 6%
Interest is paid quarterly
Bonds sold at 98

Amount received from sale of bonds 980,000

Annual interest $ 60,000

Quarterly interest $ 15,000
 Brief Exercise 10.4 Brief Exercise 10.5
Bonds sold 1,000,000 Bonds sold
Bond interest rate 5% Bonds sold at
Bonds sold at 101 Bond interest rate
Life of bonds
Amount received from sale of bonds 1,010,000

Annual interest $ 50,000 Cash received from sale of bonds

Quarterly interest $ 12,500 Cash paid for interest in 1st year

Discount on sale of bonds

1st year interest exp recognized

Interest paid
Plus: Amortization of discount
1st year interest exp recognized
ef Exercise 10.5 Brief Exercise 10.6
$ 500,000 Bonds sold $ 700,000
97 Bonds sold at 102
5% Bond interest rate 6.50%
10 years Life of bonds 10 years

$ 485,000 Cash received from sale of bonds $ 714,000

$ 25,000 Cash paid for interest in 1st year $ 45,500

$ 15,000 Premium on sale of bonds $ 14,000

1st year interest exp recognized

$ 25,000 Interest paid $ 45,500
$ 1,500 Less: Amortization of premium (1400)
$ 26,500 1st year interest exp recognized $ 44,100