Question

On 1 January 2019, Halo Limited purchased a 12% $900,000 bond as its debt investment.

1. Halo purchased the bond at $968,234.

2. The bond provides bondholders with a 10% yield per annum.

3. The bond matures on 1 January 2024, with interest payable on 31 December each year.

4. Halo’s business model for the bond is held-for collection.

Required: Prepare a bond amortisation schedule by showing cash received, interest revenue, any premium or discount amortised and the carrying amount of bonds on 31 December 2019 and 2020 (rounded to the nearest dollar).

Answer 1

Year	Cash Received	Interest Income	Premium Amort	Carrying Bond Value
2019	108,000	96,823	11,177	957,057
2020	108,000	95,706	12,294	944,763
2021	108,000	94,476	13,524	931,240
2022	108,000	93,124	14,876	916,364
2023	108,000	91,636	16,364	900,000
Total	540,000	471,766	68,234

Interest income for any year will be opening carrying bond value multiplied by yield per year and any excess of cash received over such interest income will be premium amortization for the year. Such premium amortization for the year will be reduced from the opening bond carrying value to arrive at closing bond carrying value.

Hence, for Year 1, the interest income = Opening Bond value x Yield Rate i.e. 968,234 x 10% = 96,823. Since Cash received is 108,000 the excess of 11,177 (108,000-96,823) will be accounted as premium amortization. This premium amortization will be reduced from the opening bond value leaving the closing bond value at 957,057 (968,234-11,177)

For year 2, the since the opening bond value is 957,057, interest income = 957,057 x 10% i.e. 95,706. Against cash received of 108,000, the excess of 12,294 (108,000-95706) will be accounted as premium amortization. This premium amortization will again be reduced from the opening bond value leaving the closing bond value at 944,763 (957,057-12,294) and so on for years 3-5. At the end of year 5, the bond value will be 900,000 for which the amount is received on 1/1/2024.