Question

14-13 Stanford issues bonds dated 1/1/2017 with a par value of $400,000.
The bonds 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%.
The bonds are sold for $370511. 1. What is the amount of the discount on the bonds at issuance? 2. How much bond interest expense will be recognized over the life of the bonds? 3. Prepare an amortization for these bonds; use the effective interest method to amortize the discount.

Answer 1

Correct Answer:

1:

Discount on bonds

$                          29,489

2:

Interest Expense recognized

$                      1,37,489

3:

Effective Interest Amortization Table
Formula Used	(400,000*9%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (12%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
	Changes during the bond
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
01 January 2017		-	-	$ 3,70,511
30 June 2017	$      18,000	$       22,231	$      4,231	$ 3,74,742
31 December 2017	$      18,000	$      22,484	$      4,484	$ 3,79,226
30 June 2018	$      18,000	$       22,754	$      4,754	$ 3,83,980
31 December 2018	$      18,000	$       23,039	$      5,039	$ 3,89,019
30 June 2019	$      18,000	$       23,341	$      5,341	$ 3,94,360
31 December 2019	$      18,000	$       23,640	$      5,640	$ 4,00,000
Total	$   1,08,000	$   1,37,489	$   29,489

End of Answer.

Thanks