Question

Stanford issues bonds dated January 1, 2017, with a par value of $260,000. The bonds’ annual contract rate is 9%, 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 12%, and the bonds are sold for $240,832.
  
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 effective interest method to amortize the discount for these bonds.

Complete this question by entering your answers in the tabs below.

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

Discount

$

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

	Total Bond Interest Expense Over Life of Bonds: Amount repaid: payments of Par value at maturity Total repaid 0 Less amount borrowed Total bond interest expense $0

Prepare an amortization table using the effective interest method to amortize the discount for these bonds. (Round all amounts to the nearest whole dollar.)

	Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Discount Amortization Unamortized Discount Carrying Value 01/01/2017 06/30/2017 12/31/2017 06/30/2018 12/31/2018 06/30/2019 12/31/2019 Total

Answer 1

Solution:(1): Calculation of the amount of discount on the bond:

Face value of the bond = $260,000

Sale value of the bond = $240,832

Therefore, the amount of discount on the bonds are

= Face value - sale value = 260000-240832 = $19,168

Solution:(2): Calculation of total bond interest expense to be recognised:

Amount repaid:. Amount($)

6 Payment of. $11,700. 70,200

Par value at maturity. 260,000

Total repaid(70200+260000). 330,200

Less: Amount borrowed. (240,832)

Total bond interest expense. 89,368

Solution:(3): Amortization table using effective interest method:

Semi-annual interest period end	Cash Interest paid($)	Bond interest expense($)	Discount amortization ($)	Unamortized discount($)	Carrying value ($)
01/01/2017				19,168	240,832
06/30/2017	11,700	14,450	2,750	16,418	243,582
12/31/2017	11,700	14,615	2,915	13,503	246,497
06/30/2018	11,700	14,790	3,090	10,413	249,587
12/31/2018	11,700	14,975	3,275	7,138	252,862
06/30/2019	11,700	15,172	3,472	3,666	256,334
12/31/2019	11,700	15,366	3,666	0	260,000
Total	70,200	89,368	19,168