On January 1 2016 a company issues 3year bonds with a face v

On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.

On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.

On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.

Required:

Fill in the table assuming the company uses effective-interest bond amortization. (Round your answers to the nearest whole dollar.)

Solution

Bonds Amortization table: Date Coupon interest paid in cash@7% Interest Expense@5% Premium amortization Unamortized premium Carrying Value Face Value Jauary 1, 2016 $                3,268 $     63,268 $       60,000 Decemebr 31, 2016 $                          4,200 $                   3,163 $              1,037 $                2,231 $     62,231 $       60,000 Decemebr 31, 2017 $                          4,200 $                   3,112 $              1,088 $                1,143 $     61,143 $       60,000 Decemebr 31, 2018 $                          4,200 $                   3,057 $              1,143 $                        0 $     60,000 $       60,000 Working: Coupn Interest paid in cash = Face Value x Stated Interest Rate = $                 60,000 x 7% = $                   4,200 Coupon interest is paid on face value.So it is same for all years. Interest Expense = Beginning of year Book Value x market interest rate Year Beginning Book Value x Market Interest rate = Interest Expense 1 $                        63,268 x 5% = $       3,163 2 $                        62,231 x 5% = $       3,112 3 $                        61,143 x 5% = $       3,057