Question

Exercise 10-2 Straight-Line: Amortization of bond discount LO P2Tano issues bonds with a par value of $93,000 on January 1, 2017. The bonds’ annual contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $90,561.

1. What is the amount of the discount on these bonds at issuance?

2. How much total bond interest expense will be recognized over the life of these bonds?

3. Prepare an amortization table using the straight-line method to amortize the discount for these bonds.

Answer 1

Solution:
1.	The amount of the discount on these bonds at issuance = $2,439
Working Notes:
	The amount of the discount on these bonds at issuance = $2,439
	= Par value of Bond - Issuance price of Bond
	= $93,000 - $90,561
	= $2,439
2.	Total bond interest expense will be recognized over the life of these bonds = $21,969
Working Notes:
	Total bond interest expense over life of bonds:
	No. of payments = No. of years to mature x no. of payments in a year
	= 3 year x 2 (semi annual)
	= 6
	The semi annual interest payment = Par value of Bond x Contract rate x 1/2
		=$93,000 x 7% x 1/2
		=$3,255
	Now , Calculation:
	Amount to be repaid
	Interest:
	6 payments of $ 3,255                              =	6 x $ 3,255	=$19,530
Add:	Par value of borrowed amount to be paid at maturity		=$93,000
	Total repaid		112,530
Less:	Borrowed amount		$90,561
	Total bond interest expense		$21,969
3.	Using the straight-line method to amortize the discount for these bonds
	Semiannual Period-End	Unamortized Discount $2,439 / 6 = $406.50 per period	carrying Value
	01/01/2017	2,439	90,561
	06/30/2017	$2,032.50	$90,967.50
	12/31/2017	$1,626.00	$91,374.00
	06/30/2018	$1,219.50	$91,780.50
	12/31/2018	$813.00	$92,187.00
	06/30/2019	$406.50	$92,593.50
	12/31/2019	0	$93,000.00
Notes:	Unamortized amount is decreased by $406.50 and carrying value is increased by $406.50 in each period
Please feel free to ask if anything about above solution in comment section of the question.