Question

Compute bond proceeds, amortizing discount by interest method, and interest expense Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd issued $72,000,000 of three-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Compute the following: The amount of cash proceeds from the sale of the bonds. Round your answer to the nearest dollar. $ The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round your answer to the nearest dollar. $ The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round your answer to the nearest dollar. $ The amount of the bond interest expense for the first year. Round your answer to the nearest dollar. $

Answer 1

Bond Value = $72000000

Coupon rate = 9% (4.5% semiannually)

Issed at Market interest rate =12% (6% semiannually)

# Issue price = PV of the interest paymnet + PV of the maturity value

=>($72000000*4.5% * PVF @6% for 6 periods)+ ($72000000 * PVF @6% at the end of 6 th period)

=> ($3240000 * 4.917 ) + ($72000000* 0.705) = $66691080

# Discount on issue of Bonds = $72000000-$66691080 =$5308920

Journal entry

	Debit	Credit
Cash	66691080
Discount on Bonds Payable	5308920
To Bonds Payable		72000000

When a bond is sold at a discount, the amount of the bond discount must be amortized to interest expense over the life of the bond. Since the debit amount in the account Discount on Bonds Payable will be moved to the account Interest Expense, the amortization will cause each period's interest expense to be greater than the amount of interest paid during each of the years that the bond is outstanding.

The preferred method for amortizing the bond discount is the effective interest rate method or the effective interest method. Under the effective interest rate method the amount of interest expense in a given accounting period will correlate with the amount of a bond's book value at the beginning of the accounting period. This means that as a bond's book value increases, the amount of interest expense will increase.

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Date	Interest payment (4.5%* Face Value)	Interest Expenses(Market 6%* previous Book Value G)	Amortisation of bond discount(C-B)	Debit Balance in Bond Discount	Credit Balnce in Bonds Payable	Book Value of Bonds (F-E)
	Credit Cash	Debit Interest Expenses	Credit Bond Discount
Date of Issue				5308920	72000000	66691080
1st Semiannual	3240000	4001465	761465	4547455	72000000	67452545
2nd Semiannual	3240000	4047153	807153	3740302	72000000	68259698
3rd Semiannual	3240000	4095582	855582	2884720	72000000	69115280
4th Semiannual	3240000	4146917	906917	1977803	72000000	70022197
5th Semiannual	3240000	4201332	961332	1016471	72000000	70983529
6th Semiannual	3240000	4256471 (Round off)	1016471	0	72000000	72000000

#The amount of cash proceeds from the sale of the bonds - $66691080

# The amount of discount to be amortized for the first semiannual interest payment period, using the interest method.= $761465

#The amount of discount to be amortized for the second semiannual interest payment period = $807153

#The amount of the bond interest expense for the first year = $4001465+$4047153 = $8048618