Question

P10-6 (Algo) Recording and Reporting Bonds Issued at a Discount LO10-4

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PowerTap Utilities is planning to issue bonds with a face value of $2,600,000 and a coupon rate of 9 percent. The bonds mature in 9 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. PowerTap uses the effective-interest amortization method. Assume an annual market rate of interest of 10 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

P10-6 Part 1

Required:

A. What was the issue price on January 1 of this year? (Round your final answers to nearest whole dollar amount.)

B. What amount of interest expense should be recorded on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

C. What amount of cash should be paid to investors June 30 and December 31 of this year?

D. What is the book value of the bonds on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

Answer 1

Solution A:

Computation of bond price
Table values are based on:
n=	18
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.41552	$2,600,000.00	$1,080,352
Interest (Annuity)	11.68959	$117,000.00	$1,367,682
Price of bonds			$2,448,034

Solution B, C and D:

Bond Amortization Schedule - Effective interest method
Date	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
Jan 1, Year 1				$151,966	$2,448,034
Jun 30, Year 1	$117,000	$122,402	$5,402	$146,564	$2,453,436
Dec 31, Year 1	$117,000	$122,672	$5,672	$140,893	$2,459,107

Refer above amortization table,

amount of interest expense should be recorded on June 30 = $122,402

amount of interest expense should be recorded on Dec 30 = $122,672

amount of cash should be paid to investors June 30 = $117,000

amount of cash should be paid to investors Dec 31 = $117,000

book value of the bonds on June 30 = $2,453,436

book value of the bonds on Dec 31 = $2,459,107