On December 31, 20X7, P purchased 50 percent of S's bonds outstanding which were originally issued...

On December 31, 20X7, P purchased 50 percent of S's bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. P paid $306,000 for its investment in S's bonds and intends to hold the bonds until maturity.

How do I calculate the bond discount?

Expert Solution

The bond discount to be calculated as the difference between the face value of the bonds and actual amount paid. Here the face value of bonds include the interest of preceding years before the date of purchase.

The annual interest per year :

= $600,000*10%

= $60,000

Then, face value of bonds on December 31,20x7 is :

= $600,000 + ( $60,000*4)

= $ 840,000

Discount on bonds :

= ($840,000*50%) - $306,000

= $420,000 - $306,000

= $114,000

ekkarill92 answered 2 years ago

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