Question

Tano Company issues bonds with a par value of $85,000 on January 1, 2019. The bonds’ annual contract rate is 8%, 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 10%, and the bonds are sold for $80,684. 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 a straight-line amortization table for these bonds.

Answer 1

1.

Par value of bonds = $85,000

Issue price of bonds = $80,684

Discount on bonds payable = Par value of bonds - Issue price of bonds

= 85,000 – 80,684

= $4,316

2.

Semi annual interest payment = 85,000 x 8% x 6/12

= $3,400

Total bond interest expense over the life of the bonds

Amount repaid
6 payments of $3,400	20,400
Par value at maturity	85,000
Total repayments	105,400
Less amount borrowed (from part 1)	- 80,684
Total bond interest expense	$24,716

3.

Semi annual bond discount amortization = Discount on bonds payable/Number of semi annual interest payments

= 4,316/6

= $719

Straight line amortization table

Date	Interest payment (i)	Amortization of discount (ii)	Interest expense (i) + (ii)	Carrying value of bonds
01/01/2019				80,684
06/30/2019	3,400	719	4,119	81,403
12/31/2019	3,400	719	4,119	82,122
06/30/2020	3,400	719	4,119	82,841
12/31/2020	3,400	719	4,119	83,560
06/30/2021	3,400	719	4,119	84,279
12/31/2021	3,400	721	4,121	85,000