Question

On July 1, Hanover Company issued $2,000,000 of 10-year, 6% bonds at an effective interest rate of 5%. This netted the company $2,154,435. Interest on the bonds is payable annually on July 1. The president of Hanover has asked you to develop an amortization schedule worksheet (file name AMORT) that will use the effective interest method to calculate annual interest expense, premium (or discount) amortization, unamortized premium (or discount), and bond carrying amount. Your worksheet should include a Data Section.

Check figure: Amortization of bond premium, tenth year, $19,048.

To test your model, calculate the annual interest expense, discount amortization, unamortized discount, and bond carrying amount of $700,000 of 10-year, 7.5% bonds at an effective interest rate of 8%. The issuance of these bonds netted the company $676,515. Interest on the bonds is payable annually. Print the worksheet when done. Check figure: Amortization of bond discount, tenth year, $3,241.

Please show all the formulas.

Answer 1

1. Amortization Schedule :

Year	Amount Paid	Interest Expense	Premium Amortization	Unamortized Premium on Bonds	Bonds Carring Amount
0	0	0	0	$ 154,435	$ 2,154,435
1	$ 120,000	$ 107,722	$ 12,278	142,157	2,142,157
2	$ 120,000	107,108	12,892	129,265	2,129,265
3	$ 120,000	106,463	13,537	115,728	2,115,728
4	$ 120,000	105,786	14,214	101,514	2,101,514
5	$ 120,000	105,076	14,924	86,590	2,086,590
6	$ 120,000	104,330	15,670	70,920	2,070,920
7	$ 120,000	103,546	16,454	54,466	2,054,466
8	$ 120,000	102,723	17,277	37,189	2,037,189
9	$ 120,000	101,859	18,141	19,048	2,019,048
10	$ 120,000	100,952	19,048	0	2,000,000

Step 1: Multiply the beginning carrying value of the bond by the effective interest rate. That would give the annual interest expense. $ 2,154,435 x 5% = $ 107,721.75.

Bond premium amortization = $ 107,722 - 120,000 = $ 12,278.

Deduct $ 12,278 from the carrying amount of the bonds to get the new carrying amount.

New carrying amount of bonds = $ 2,154,435 - $ 12,278 = $ 2,142,157.

Now apply the effective interest rate of 5% to the new carrying amount. It comes to $ 107,108.

Premium amortization = $ 120,000 - $ 107,108 = $ 12,892. Deduct this value from the carrying amount to arrive at the new carrying amount of the bonds. This process goes on till the premium is fully amortized.

2. Amortization Schedule:

Year	Amount Paid	Interest Expense	Discount Amortization	Unamortized Discount	Bond Carrying Amount
0	0	0	0	$ 23,485	$ 676,515
1	$ 52,500	54,121	1,621	21,864	678,136
2	52,500	54,251	1,751	20,113	679,887
3	52,500	54,391	1,891	18,222	681,778
4	52,500	54,542	2,042	16,180	683,820
5	52,500	54,706	2,206	13,974	686,026
6	52,500	54,882	2,382	11,592	688,408
7	52,500	55,073	2,573	9,019	690,981
8	52,500	55,278	2,778	6,241	693,758
9	52,500	55,501	3,001	3,241	696,759
10	52,500	55,741	3,241	0	700,000