Question

Exercise 10-18B Effective Interest: Amortization of bond discount LO P5 Stanford issues bonds dated January 1, 2019, with a par value of $250,000. 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 $231,570. 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 effective interest amortization table for these bonds. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the amount of the discount on these bonds at issuance? Discount $ 18,430 - Required 1 Required 2 >

Answer 1

1)	To calculate the amount of the discount on these bonds at issuance :
	Discount= $ 18,430
	EXPLANATION :
	Par value of bonds	$ 250,000
	Less: selling price of bonds	($231,570)
	Discount of bonds at issuance	$ 18,430
2)	To calculate the Total bond interest expenses will be recognized
	over the life of these bonds
	Total Bond interest expenses	$ 85,930
	EXPLANATION :
	Particulars	Amount($)
	interest expenses per year {$250,000 *9%}	$ 22,500
	Number of payments per year	2 times
	Semi annual payment ($22,500 /2 times)	$ 11,250
	Bond interest expense over life of bonds :
	6 payments of $ 11,250 ( 3 years * 2 times )	$ 67,500
	Par value of maturity	$ 250,000
	Total repaid	$ 317,500
	Less: Amount borrowed	($231,570)
	Total Bond interest expenses	$ 85,930

3)	Prepare an effective interest amortization table for these bonds :

Semiannual	Cash interest	Bond interest	Discount	Unamortized	Carrying value
interest	paid	expense	Amortization	Discount
period- End
01-01-2019				$ 18,430	$ 231,570
06/30/2019	$ 11,250 {$250,000*4.5%}	$13,894         {$ 231,570 *6%}	$ 2,644       {$13,894 - $ 11,250}	$ 15,786      {$18,430-$ 2,644}	$ 234,214    {$231,570+$2,644}
12/31/2019	$ 11,250 {$250,000*4.5%}	$ 14,053        {$234,214*6%}	$ 2,803       {$14,053 -$11,250}	$ 12,983      {$15,786-$ 2,803}}	$ 237,017    {$234,214+$2,803}
06/30/2020	$ 11,250 {$250,000*4.5%}	$ 14,221       {$237,017*6%}	$ 2,971       {$14,221 -$11,250}	$ 10,012      {$12,983-$ 2,971}}	$ 239,988    {$237,017+$2,971}
12/31/2020	$ 11,250 {$250,000*4.5%}	$ 14,399       {$239,988 *6%}	$ 3,149       {$14,399 -$11,250}	$ 6,863      {$10,012-$ 3,149}}	$ 243,137    {$239,988+$ 3,149}
06/30/2021	$ 11,250 {$250,000*4.5%}	$ 14,588       {$243,137 *6%}	$ 3,338       {$14,588 -$11,250}	$ 3,525      {$6,836-$ 3,338}}	$ 246,475    {$243,137+$ 3,338}
12/31/2021	$ 11,250 {$250,000*4.5%}	$ 14,775    {$11,250+$3,525 }	$ 3,525	$ 0               {$3,525-$3,525}	$ 250,000    {$246,475+$3,525}
Total	$ 67,500	$ 85,930	$ 18,430