Corporation is considering issuing bonds on January 1, 2009, and has asked your advice concerning several matters. The firm plans to issue $800,000 of 30-year, 10 percent bonds. Bond interest payments are on January 1 and July 1.

IfthebondsareissuedonJanuary1,2009,atapriceof91.275whenthe market interest rate is 11 percent, how much cash will the firm receive? Explain to the president of the corporation the amount of interest expense the firm will report on their income statement during the first year and how much cash will be paid in interest during that time.

To find out how much cash the corporation will receive when issuing the bonds, you need to calculate the bond proceeds. The bond proceeds can be calculated by multiplying the face value of the bonds by the issue price.

In this case, the face value of the bonds is $800,000. The issue price is given as 91.275% of the face value, which can be expressed as 0.91275. Therefore, the bond proceeds can be calculated as follows:

Bond Proceeds = Face Value * Issue Price
= $800,000 * 0.91275
= $730,200

The corporation will receive $730,200 in cash when issuing the bonds.

Next, let's calculate the interest expense that the firm will report on their income statement during the first year. The interest expense can be calculated using the effective interest method.

The effective interest method calculates interest expense as the difference between the market interest rate and the bond's effective interest rate, multiplied by the carrying value of the bonds.

To find the carrying value of the bonds, subtract the annual amortization from the original bond proceeds. Since these bonds are issued at a discount, the annual amortization is the difference between the bond face value and the bond proceeds divided by the number of periods.

In this case, since the bonds have a 30-year maturity and they pay interest semi-annually, there will be 60 periods (30 years * 2).

Now let's calculate the annual amortization:

Annual Amortization = (Face Value - Bond Proceeds) / Number of Periods
= ($800,000 - $730,200) / 60
= $69,800 / 60
= $1,163.33 (approximately)

The carrying value of the bonds at the beginning of the first year is equal to the bond proceeds ($730,200), as it is the first year.

Next, let's calculate the effective interest expense:

Effective Interest Expense = Carrying Value * Market Interest Rate
= $730,200 * 0.11
= $80,322

Finally, let's calculate the interest expense to be reported on the income statement during the first year:

Interest Expense = Effective Interest Expense - Annual Amortization
= $80,322 - $1,163.33
= $79,158.67 (approximately)

The corporation will report $79,159 as interest expense on their income statement during the first year.

Now, let's calculate the cash paid in interest during the first year. Since the bonds pay interest semi-annually, the cash paid in interest each period is equal to the bond face value multiplied by the bond interest rate divided by the number of periods per year.

In this case, the face value of the bonds is $800,000, the interest rate is 10%, and there are 2 periods per year (January 1 and July 1), so let's calculate the cash paid in interest for the first year:

Cash Paid in Interest = Face Value * Bond Interest Rate / Number of Periods per Year
= $800,000 * 0.10 / 2
= $40,000

The corporation will pay $40,000 in cash as interest during the first year.