Question

Tano issues bonds with a par value of $95,000 on January 1, 2017. 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 $90,177.
  
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.

Answer 1

Answer 1

Discount on bonds at issuance = Par value - Cash receipt on issue of bonds = $95,000 - $90,177 = $4,823

Answer 2

Total bond interest expense will be recognized over the life of the bonds

Cash to be paid for annual interest payment : $95,000 * 8%	$7,600
Multiply by Life of bonds	3 years
Total Interest payment to be made over life of the bonds	$22,800
Add :Discount on bonds at issuance	$4,823
Total bond interest expense will be recognized over the life of the bonds	$27,623

Answer 3

Note : Discount to be amortize per period = $4,823 / 6 = $804

Amortization table using the straight-line method to amortize the discount

Period (Semi annual)	Unamortized discount ($)	Carrying value of bonds ($)
January 1, 2017	4,823	90,177
June 30, 2017	4,019	90,981
December 31 ,2017	3,215	91,785
June 30, 2018	2,411	92,589
December 31 ,2018	1,607	93,393
June 30, 2019	804	94,197
December 31 ,2019	0	95,000