Question

On January 1 of this year, Ikuta Company issued a bond with a face value of $155,000 and a coupon rate of 7 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 8 percent. Ikuta uses the effective-interest amortization method.

1. Complete a bond amortization schedule for all three years of the bond's life.

2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2?

Answer 1

Solution 1:

Chart Values are based on:
n	3	years
i=	8.00%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Principal	0.793832	*	$1,55,000	=	$1,23,044
Interest (Annuity) [$155,000*7%]	2.577097	*	$10,850	=	$27,962
Price of Bonds					$1,51,005

Bond Amortization Schedule
Date	Cash interest	Interest Expense	Discount amortized	Carrying value
1-Jan-Year 1				$1,51,005
31-dec-Year 1	$10,850	$12,080	$1,230	$1,52,236
31-dec-Year 2	$10,850	$12,179	$1,329	$1,53,565
31-dec-Year 3	$10,850	$12,285	$1,435	$1,55,000

Solution 2:

		Year 1	Year 2
Income statement	Interest expense	$12,080	$12,179
Balance Sheet	Bonds Payable	$1,52,236	$1,53,565