Question

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108.

a) Using effective-interest amortization, how much interest expense will be recognized in 2017?

b) Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet?

c) Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018?

d) What is interest expense for 2018, using straight-line amortization?

Answer 1

Effective Interest Amortization Schedule:

Period	Cash Payment	Interest Expense	Discount Amortization	Carrying Value
				14703108
1	585000	588124.3	3124.32	14706232
2	585000	588249.3	3249.293	14709482
3	585000	588379.3	3379.265	14712861
4	585000	588514.4	3514.435	14716375
5	585000	588655	3655.012	14720030
6	585000	588801.2	3801.213	14723832
7	585000	588953.3	3953.262	14727785
8	585000	589111.4	4111.392	14731896
9	585000	589275.8	4275.848	14736172
10	585000	589446.9	4446.882	14740619
11	585000	589624.8	4624.757	14745244
12	585000	589809.7	4809.747	14750053
13	585000	590002.1	5002.137	14755056
14	585000	590202.2	5202.222	14760258
15	585000	590410.3	5410.311	14765668
16	585000	590626.7	5626.724	14771295
17	585000	590851.8	5851.793	14777147
18	585000	591085.9	6085.864	14783232
19	585000	591329.3	6329.299	14789562
20	585000	591582.5	6582.471	14796144
21	585000	591845.8	6845.77	14802990
22	585000	592119.6	7119.601	14810110
23	585000	592404.4	7404.385	14817514
24	585000	592700.6	7700.56	14825215
25	585000	593008.6	8008.582	14833223
26	585000	593328.9	8328.926	14841552
27	585000	593662.1	8662.083	14850214
28	585000	594008.6	9008.566	14859223
29	585000	594368.9	9368.909	14868592
30	585000	594743.7	9743.665	14878335
31	585000	595133.4	10133.41	14888469
32	585000	595538.7	10538.75	14899007
33	585000	595960.3	10960.3	14909968
34	585000	596398.7	11398.71	14921366
35	585000	596854.7	11854.66	14933221
36	585000	597328.8	12328.84	14945550
37	585000	597822	12822	14958372
38	585000	598334.9	13334.88	14971707
39	585000	598868.3	13868.27	14985575
40	585000	599423	14423	14999998

Requirement a:

Interest Expense recognized in 2017 = $588124+$588249 = $1176374

Requirement b:

Carrying Value Value as on December 31, 2017 = Carrying Value as at the period 2 end = $14709482

Straight line Amortization Schedule:

Period	Cash Payment	Interest Expense	Discount Amortization	Carrying Value
				14703108
1	585000	592422.3	7422.3	14710530
2	585000	592422.3	7422.3	14717953
3	585000	592422.3	7422.3	14725375
4	585000	592422.3	7422.3	14732797
5	585000	592422.3	7422.3	14740220
6	585000	592422.3	7422.3	14747642
7	585000	592422.3	7422.3	14755064
8	585000	592422.3	7422.3	14762486
9	585000	592422.3	7422.3	14769909
10	585000	592422.3	7422.3	14777331
11	585000	592422.3	7422.3	14784753
12	585000	592422.3	7422.3	14792176
13	585000	592422.3	7422.3	14799598
14	585000	592422.3	7422.3	14807020
15	585000	592422.3	7422.3	14814443
16	585000	592422.3	7422.3	14821865
17	585000	592422.3	7422.3	14829287
18	585000	592422.3	7422.3	14836709
19	585000	592422.3	7422.3	14844132
20	585000	592422.3	7422.3	14851554
21	585000	592422.3	7422.3	14858976
22	585000	592422.3	7422.3	14866399
23	585000	592422.3	7422.3	14873821
24	585000	592422.3	7422.3	14881243
25	585000	592422.3	7422.3	14888666
26	585000	592422.3	7422.3	14896088
27	585000	592422.3	7422.3	14903510
28	585000	592422.3	7422.3	14910932
29	585000	592422.3	7422.3	14918355
30	585000	592422.3	7422.3	14925777
31	585000	592422.3	7422.3	14933199
32	585000	592422.3	7422.3	14940622
33	585000	592422.3	7422.3	14948044
34	585000	592422.3	7422.3	14955466
35	585000	592422.3	7422.3	14962889
36	585000	592422.3	7422.3	14970311
37	585000	592422.3	7422.3	14977733
38	585000	592422.3	7422.3	14985155
39	585000	592422.3	7422.3	14992578
40	585000	592422.3	7422.3	15000000

Requirement c:

Carrying Value as on December 31 2018

= Carrying Value as at the end of Period 4

= $14732797

Requirement d:

Interest Expense for 2018

= $592422 * 2

= $1184845