Homework SourseExercise 102 StraightLine Amortization of bond discount LO P
Exercise 10-2 Straight-Line: Amortization of bond discount LO P2Tano issues bonds with a par value of $93,000 on January 1, 2017. The bonds’ annual contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $90,561.
1. What is the amount of the discount on these bonds at issuance?
2. How much total bond interest expense will be recognized over the life of these bonds?
3. Prepare an amortization table using the straight-line method to amortize the discount for these bonds.
Solution
Solution: 1. The amount of the discount on these bonds at issuance = $2,439 Working Notes: The amount of the discount on these bonds at issuance = $2,439 = Par value of Bond - Issuance price of Bond = $93,000 - $90,561 = $2,439 2. Total bond interest expense will be recognized over the life of these bonds = $21,969 Working Notes: Total bond interest expense over life of bonds: No. of payments = No. of years to mature x no. of payments in a year = 3 year x 2 (semi annual) = 6 The semi annual interest payment = Par value of Bond x Contract rate x 1/2 =$93,000 x 7% x 1/2 =$3,255 Now , Calculation: Amount to be repaid Interest: 6 payments of $ 3,255 = 6 x $ 3,255 =$19,530 Add: Par value of borrowed amount to be paid at maturity =$93,000 Total repaid 112,530 Less: Borrowed amount $90,561 Total bond interest expense $21,969 3. Using the straight-line method to amortize the discount for these bonds Semiannual Period-End Unamortized Discount $2,439 / 6 = $406.50 per period carrying Value 01/01/2017 2,439 90,561 06/30/2017 $2,032.50 $90,967.50 12/31/2017 $1,626.00 $91,374.00 06/30/2018 $1,219.50 $91,780.50 12/31/2018 $813.00 $92,187.00 06/30/2019 $406.50 $92,593.50 12/31/2019 0 $93,000.00 Notes: Unamortized amount is decreased by $406.50 and carrying value is increased by $406.50 in each period Please feel free to ask if anything about above solution in comment section of the question.
