Question

A company issues $5,000,000, 6%, 10-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,320,500.

Using straight-line amortization, what will:

a) The carrying value of the bonds be on the December 31, 2018 balance sheet?

b) How much interest expense will be recognized in 2018?

Using effective interest amortization, what will:

c) The carrying value of the bonds be on the December 31, 2017 balance sheet?

d) How much interest expense will be recognized in 2017?

Answer 1

Straight-line:

Requirement 1:

Face value of the bonds	$5,000,000
Issue price	($4,320,500)
Discount on bonds payable	$679,500
÷ Number of interest payments [10 yrs x 2]	20
Discount amortization	$33,975
Carrying value at Jan 1,2017	$4,320,500
Add: Discount amortized till Dec 31,2018 [33,975 x 4]	$135,900
Carrying value at Dec 31,2018	$4,456,400

Requirement 2:

Interest payment [$5,000,000 x 6% x (6/12)]	$150,000
Discount amortized	$33,975
Interest expense for each period	$183,975
x Number of interest payments in Year 2018	2
= Interest expense for 2018	$367,950

Effective interest:

c	Carrying value at 12/31/2017	$4,367,053
d	Interest expense for 2017	$346,553

Calculations:

Effective interest
	i	ii = preceding carrying value x 4%	iii = ii-i	iv = Preceding carrying value + iii
Date	Interest payment	Interet expense	Discount amortization	Carrying value
1/1/2017				$4,320,500
06/30/2017	$150,000	$172,820	$22,820	$4,343,320
12/31/2017	$150,000	$173,733	$23,733	$4,367,053
Total		$346,553