E1015 Supplement 10B Recording the Effects of a Discount Bon

E10-15 (Supplement 10B) Recording the Effects of a Discount Bond Issue and First Interest Payment and Preparing a Discount Amortization Schedule (Effective-Interest Amortization) [LO 10-S2] [The following information applies to the questions displayed below. On January 1, when the market interest rate was 10 percent, Seton Corporation completed a $240,000, 9 percent bond issue for $225,243. The bonds pay interest each December 31 and mature in 10 years. Assume Seton Corporation uses the effective-interest method to amortize the bond discount.

Solution

Discount bond amortization Changes during the period Changes during the period Period Ended Interest Expenses Cash Paid Discount amortized Bonds Payable Discount on bonds payable Carrying Value Start $          2,40,000 $                                        14,757 $          2,25,243 Yr 1 End                                           22,524        21,600                                    924              2,40,000                                            13,833              2,26,167 Yr 2 End                                           22,617        21,600                                1,017              2,40,000                                            12,816              2,27,184 Yr 3 End                                           22,718        21,600                                1,118              2,40,000                                            11,698              2,28,302 Yr 4 End                                           22,830        21,600                                1,230              2,40,000                                            10,467              2,29,533 Yr 5 End                                           22,953        21,600                                1,353              2,40,000                                              9,114              2,30,886 Yr 6 End                                           23,089        21,600                                1,489              2,40,000                                              7,625              2,32,375 Yr 7 End                                           23,237        21,600                                1,637              2,40,000                                              5,988              2,34,012 Yr 8 End                                           23,401        21,600                                1,801              2,40,000                                              4,187              2,35,813 Yr 9 End                                           23,581        21,600                                1,981              2,40,000                                              2,205              2,37,795 Yr 10 End                                           23,805        21,600                                2,205              2,40,000                                                     -0              2,40,000 Working: Current Proceeds from the issuance of bond is the present value of cash flow from bond -(a) Coupon Interest and (b) Face Value Pesent Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.10)^-10)/0.10 i 10% =                              6.1446 n 10 Present Value of 1 = (1+i)^-n = (1+0.10)^-10 =                              0.3855 Total Proceeds from the issuance of bond                                  2,25,243.00 Less Present Value of face value of bond                    2,40,000.00 x 0.3855                                      92,530.39 Present Value of annual coupon                                  1,32,712.61 / Present Value of annuity of 1                                            6.1446 Annual coupon payment                                      21,598.37 Now, Annual coupon rate = Annual coupon payment / Face Value of Bond =                        21,598.37 /                                  2,40,000.00 = 8.99932% Thus, Exact amount of annual coupon =                          2,40,000 x 9.00% =                              21,600