The CFO informed the board that, due to Big Valley Hospital’s AAA credit rating, the market rate of interest at the date of bond issuance would only be 2 percent.

1. How much cash will Big Valley Hospital get from issuing the bonds? (Ignore issuance costs.)

2. What will be the amount of Year 1 interest expense in the financial statements for the bonds?

3. What journal entry would be required to record interest expense for Year 1?

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The board of directors and CEO of Big Valley Hospital have authorized temporary financing of a major hospital expansion by selling $10 million of three-year term bonds with a coupon (stated) interest rate of 3 percent. Interest is payable annually. The CFO prepared the following principal and interest repayment table for the board's information: End of Year o End of Year 1 End of Year 2 End of Year 3 Totals Bond face $10,000,000 amount Yearly $300,000 $300,000 $300,000 $900,000 interest Principal $10,000,000 $10,000,000 repayment Total $10,900,000 payments The board of directors and CEO of Big Valley Hospital have authorized temporary financing of a major hospital expansion by selling $10 million of three-year term bonds with a coupon (stated) interest rate of 3 percent. Interest is payable annually. The CFO prepared the following principal and interest repayment table for the board's information: End of Year o End of Year 1 End of Year 2 End of Year 3 Totals Bond face $10,000,000 amount Yearly $300,000 $300,000 $300,000 $900,000 interest Principal $10,000,000 $10,000,000 repayment Total $10,900,000 payments

Answer rating: 100% (QA)

Effective Interest Rate2 Bond Life 3 Years Present Value of an Annuity PVIFA2328839 Present value Fa... View the full answer