Question

1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%.
  Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end.

Can you show me how to compute the cash amount and interest expense?

Answer 1

Face Value of Bond = $500,000

Annual Coupon Rate = 10.00%
Semiannual Coupon Rate = 5.00%
Semiannual Coupon = 5.00% * $500,000
Semiannual Coupon = $25,000

Time to Maturity = 3.50 years
Semiannual Period = 7

Annual Yield = 12.00%
Semiannual Yield = 6.00%

Issue Value of Bond = $25,000 * PVIFA(6.00%, 7) + $500,000 * PVIF(6.00%, 7)
Issue Value of Bond = $25,000 * (1 - (1/1.06)^7) / 0.06 + $500,000 * (1/1.06)^7
Issue Value of Bond = $25,000 * 5.582381 +$500,000 * 0.665057
Issue Value of Bond = $472,088

Date Cash Interest Mar. 01, 2017 Sept. 01, 2017 $ Mar. 01, 2018 $ Sept. 01, 2018 $ Mar. 01, 2019 $ Sept. 01, 2019 $ Mar. 01, 2020 $ Sept. 01, 2020 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ Interest | Discount Unamortized Carrying Value Expense Amortized Discount $ 27,912 $ 472,088 28,325 $ 3,325 $ 24,587 $ 475,413 28,525 $ 3,525 $ 21,062 $ 478,938 28,736 $ 3,736 $ 17,326 $ 482,674 28,960 $ 3,960 $ 13,366 $ 486,634 29,198 $ 4,198 $ 9,168 $ 490,832 29,450 $ 4,450 $ 4,718 $ 495,282 29,718$ 4,718 $ 0 $ 500,000 Interest Expense = 6% * Beginning Carrying Value