Question

Exercise 10-2 Straight-Line: Amortization of bond discount LO P2 Tano issues bonds with a par value of $80,000 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 $75,938. 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

1
Discount	4062	=80000-75938
2
Total interest expense over life of bonds
6 payments of $ 3200	19200
Par value at maturity	80000
Total repaid	99200
Less: Amount borrowed	75938
Total bond interest expense	23262
3
Semiannual Interest period end	Unamortized Discount	Carrying value
01/01/2017	4062	75938
06/30/2017	3385	76615
12/31/2017	2708	77292
06/30/2018	2031	77969
12/31/2018	1354	78646
06/30/2019	677	79323
12/31/2019	0	80000
Workings:
Semiannual Interest payment	3200	=80000*8%/2
Semiannual Discount amortization	677	=4062/6