Question

Exercise 10-13B Effective Interest: Amortization of bond discount LO P5

Stanford issues bonds dated January 1, 2017, with a par value of $500,000. The bonds' annual contract 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%, and the bonds are sold for $463,140.

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 effective interest method to amortize the discount for these bonds.

Answer 1

1	The discount on these bonds at issuance $36,860
	($500,000 - $36,860)
2	Total bond interest expense $171,860
3
	Semiannual Interest Period End	Cash Interest Paid	Bond Interest Exp.	Discount Amortization	Unamortized Discount	carrying value
	01/01/2017				$36,860	$463,140
	06/30/2017	$22,500	$27,788	$5,288	$31,572	$468,428
	12/31/2017	$22,500	$28,106	$5,606	$25,966	$474,034
	06/30/2018	$22,500	$28,442	$5,942	$20,024	$479,976
	12/31/2018	$22,500	$28,799	$6,299	$13,725	$486,275
	06/30/2019	$22,500	$29,176	$6,676	$7,049	$492,951
	12/31/2019	$22,500	$29,549	$7,049	$0	$500,000
	Working
	Cash Interest Paid $500,000 × 0.09 × 1/2 = $22,500
	Bond Interest Exp $463,140 × 0.12 × 1/2 = $27,788
	Discount amortized = $27,788 - $22,500 = $5,288