If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment...

If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment is $50 (coupon rate is 5%, face value of bond is $1,000), and the annual market interest rate for the period is 6%, what is the amount of amortization and the ending balance of the bond?

Select one:

a. Amortization = Interest Expense – Payment = ($885.30 * 6%) – $50 = $3.12 / Ending Balance = Beginning Balance + Amortization = $885.30 + $3.12 = $888.42

b. Amortization = Interest Expense – Payment = ($885.30 * 6%) – $50 = $3.12 / Ending Balance = Beginning Balance - Amortization = $885.30 – $3.12 = $882.18

c. Amortization = Interest Expense + Payment = ($885.30 * 6%) + $50 = $103.12 / Ending Balance = Beginning Balance - Amortization = $885.30 – $103.12 = $782.18

d. Amortization = Interest Expense + Payment = ($885.30 * 6%) + $50 = $103.12 / Ending Balance = Beginning Balance + Amortization = $885.30 + $103.12 = $988.42

Expert Solution

Correct Option is :

a. Amortization = Interest Expense – Payment = ($885.30 * 6%) – $50 = $3.12 / Ending Balance = Beginning Balance + Amortization = $885.30 + $3.12 = $888.42

Working:

Bonds Amortization Table
Semiannual Interest Date	Int Pmt (5%* Maturity Value)	Interest Expense (6%* Preceding Bond Carrying Value)	Discount Amortization (C-B)	Discount Account Balance (Preceding E-D)	Bond Carrying Amount ($4,000,000 - E)
issue date				114.70	885.30
Year 1	$ 50	$ 53.12	3.12 (53.12 - 50)	111.58	888.42 (885.30+3.12)

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