Question

On January 1, 2021, Splash City issues $470,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 10%, the bonds will issue at $429,678. Required: 1. Complete the first three rows of an amortization table.

Answer 1

Par value of bonds = $470,000

Semi annual interest payment = 470,000 x 9% x 6/12

= $21,150

Effective interest rate = 10%

Semi annual Effective interest rate = 5%

Issue price of bonds = $429,678

Discount on bonds payable = Par value of bonds - Issue price of bonds

= 470,000 - 429,678

= $40,322

Date	Cash paid	Interest expense	Change in carrying value	Carrying value
1/1/21				429,678
6/30/21	21,150	429,678 x 5% = 21,484	21,484 - 21,150 = 334	429,678 + 334 = 430,012
12/31/21	21,150	430,012 x 5% = 21,501	21,501 - 21,150 = 351	430,012 + 351 = 430,363

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