Homework SourseOn July 1 Hanover Company issued 2000000 of 10year 6 bonds a
On July 1, Hanover Company issued $2,000,000 of 10-year, 6% bonds at an effective interest rate of 5%. This netted the company $2,154,435. Interest on the bonds is payable annually on July 1. The president of Hanover has asked you to develop an amortization schedule worksheet (file name AMORT) that will use the effective interest method to calculate annual interest expense, premium (or discount) amortization, unamortized premium (or discount), and bond carrying amount. Your worksheet should include a Data Section.
Check figure: Amortization of bond premium, tenth year, $19,048.
To test your model, calculate the annual interest expense, discount amortization, unamortized discount, and bond carrying amount of $700,000 of 10-year, 7.5% bonds at an effective interest rate of 8%. The issuance of these bonds netted the company $676,515. Interest on the bonds is payable annually. Print the worksheet when done. Check figure: Amortization of bond discount, tenth year, $3,241.
Please show all the formulas.
Solution
1. Amortization Schedule :
Step 1: Multiply the beginning carrying value of the bond by the effective interest rate. That would give the annual interest expense. $ 2,154,435 x 5% = $ 107,721.75.
Bond premium amortization = $ 107,722 - 120,000 = $ 12,278.
Deduct $ 12,278 from the carrying amount of the bonds to get the new carrying amount.
New carrying amount of bonds = $ 2,154,435 - $ 12,278 = $ 2,142,157.
Now apply the effective interest rate of 5% to the new carrying amount. It comes to $ 107,108.
Premium amortization = $ 120,000 - $ 107,108 = $ 12,892. Deduct this value from the carrying amount to arrive at the new carrying amount of the bonds. This process goes on till the premium is fully amortized.
2. Amortization Schedule:
| Year | Amount Paid | Interest Expense | Premium Amortization | Unamortized Premium on Bonds | Bonds Carring Amount |
| 0 | 0 | 0 | 0 | $ 154,435 | $ 2,154,435 |
| 1 | $ 120,000 | $ 107,722 | $ 12,278 | 142,157 | 2,142,157 |
| 2 | $ 120,000 | 107,108 | 12,892 | 129,265 | 2,129,265 |
| 3 | $ 120,000 | 106,463 | 13,537 | 115,728 | 2,115,728 |
| 4 | $ 120,000 | 105,786 | 14,214 | 101,514 | 2,101,514 |
| 5 | $ 120,000 | 105,076 | 14,924 | 86,590 | 2,086,590 |
| 6 | $ 120,000 | 104,330 | 15,670 | 70,920 | 2,070,920 |
| 7 | $ 120,000 | 103,546 | 16,454 | 54,466 | 2,054,466 |
| 8 | $ 120,000 | 102,723 | 17,277 | 37,189 | 2,037,189 |
| 9 | $ 120,000 | 101,859 | 18,141 | 19,048 | 2,019,048 |
| 10 | $ 120,000 | 100,952 | 19,048 | 0 | 2,000,000 |
