Question

Exercise 10-2 Straight-Line: Amortization of bond discount LO P2

Tano issues bonds with a par value of $98,000 on January 1, 2017. The bonds’ annual contract rate is 7%, 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 $90,537.
  
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 straight-line method to amortize the discount for these bonds.
I am stuck on the 3rd question!

Answer 1

Tano issues bonds

1. Determination of amount of discount on the bonds:

Amount of discount = par value – issue value

Discount = $98,000 - $90,537 = $7,463

1. Determination of total bond interest expense that would be recognized over the life of these bonds:

Interest expense = 98,000 x7% x 6/12 = $3,430

Total interest amount for 6 semiannual periods = 6 x 3,430

= $20,580

Add: par value at maturity                                    $98,000

Total repaid$118,580

Less: Bond issue value$90,537

Total bond interest expense$28,043

The difference between interest expense and total interest amount = $28,043 - $20,580 = $7,463

1. Amortization schedule:

Semiannual periods	Unamortized Discount	Carrying Value
1-Jan-17	$7,463	$90,537
30-Jun-17	$6,219	$91,780
31-Dec-17	$4,975	$93,024
30-Jun-18	$3,731	$94,268
30-Dec-18	$2,487	$95,512
30-Jun-19	$1,244	$96,756
Dec 30 ,19	$0	$98,000

Computations –

The unamortized discount of $7,463 is amortized over the 6 periods (3years x 2 semiannual interest payment periods) using the straight line amortization.

Hence, the amortized discount amount for each semiannual interest period = 7,463/6 = $1,244

With each passing semiannual period the balance in the unamortized discount gets reduced, while the carrying value of the bond increases with the same amount to reach the par value at the time of maturity.