Question

a. On January 1, Year 1, Jones Company issued bonds with a $160,000 face value, a stated rate of interest of 8.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method. What is the amount of interest expense shown on Jones' income statement for the year ending December 31, Year 1?

b.

On January 1, Year 1, Denver Co. issued bonds with a face value of $83,000, a stated rate of interest of 9%, and a 5-year term to maturity. The bonds were sold at 103. Denver uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense during Year 1?

Answer 1

Solution

(a)

Interest Expenses = Annual Coupen + Annual Discount Amortisation

(a) Face Value of Bonds	$ 160,000
(b) Issue Value of Bonds ($ 160,000 * 97%)	$ 155,200
(c) Discount on Bonds (a - b)	$ 4,800
(d) Annual Amortisation of Discount ($ 4,800 / 5 Years)	$ 960
(e) Annual Coupen Rate	8.50%
(f) Annual Coupen Amount ($ 160,000 * 8.50%)	$ 13,600
(g) Total Interest Expenses during Year 1 (d + f)	$ 14,560

(b)

Interest Expenses = Annual Coupen - Annual Amortisation of Premium

(a) Face Value of Bonds	$ 83,000
(b) Issue Value of Bonds ($ 83,000 * 103%)	$ 85,490
(c) Premium on Bonds (b - a)	$ 2,490
(d) Annual Amortisation of Premium ($ 2,490 / 5 Years)	$ 498
(e) Annual Coupen Rate	9%
(f) Annual Coupen Amount ($ 83,000 * 9%)	$ 7,470
(g) Total Interest Expenses during Year 1 (f - d)	$ 6,972

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