DiagnosticCh 10 Liabilities Q 1010 If a corporation issued 2

Diagnostic-Ch 10: Liabilities Q 10.10: If a corporation issued $2,000,000 in bonds that pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? A $140,000 B $60,000 C$200,000 D$2.000.00o

Solution

ANSWER = A) $140000

Net annual cash cost of borrowing = Interest (1- Tax)

= $2000000* 10% * ( 1 - 0.30)

= $140000

ANSWER = A) GAIN ON BOND REDEMPTION OF $ 5260

= ISSUED - REDEMPTION VALUE

= 130000 - 126000 * 0.99

=$ 5260