Question

Tano issues bonds with a par value of $82,000 on January 1, 2017. The bonds' annual contract rate is 7%, 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 8%, and the bonds are sold for $79,849. 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. 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 Rece Required 2 >

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Answer 1

Answer -

1. Answer -

Discount = $2151

Calculation:

As per given information,

Bonds par value = $82000

Bonds issue price = $79849

Therefore,

Discount:

= Bonds par value - Bonds issue price

= $82000 - $79849

= $2151

2. Answer -

Total bond interest expense over life of bonds:
Amount repaid:
6	payments of	$2870	$17220
Par value at maturity			82000
Total repaid			$99220
Less: Amount borrowed			79849
Total bond interest expense			$19371

Calculation:

As per given information,

1. Bonds mature in three years and interest on bonds paid semiannually.

Therefore, 6 interest payments are made over life of bonds.

2. Interest expense (semiannually):

= Par value of bonds * Annual contract interest rate * (6/12 months)

= $82000 * 7% * (6/12 months)

= $2870

3. 6 payments of $2870:

= 6 * $2870

= $17220

4. Total repaid:

= $82000 + $17220

= $99220

5. Total bond interest expense:

= Total repaid - Bonds issue price (Borrowed)

= $99220 - $79849

= $19371

3. Answer -

Semiannual Period-End	Unamortized Discount	Carrying Value
01/01/2017	$2151	$79849
06/30/2017	$1792.5	$80207.5
12/31/2017	$1434	$80566
06/30/2018	$1075.5	$80924.5
12/31/2018	$717	$81283
06/30/2019	$358.5	$81641.5
12/31/2019	$0	$82000

Calculation:

Under straight-line method:

= Discount / No. payments of bonds interest over life of bonds

= $2151 / 6 payments

= $358.5

a. 01/01/2017:

Unamortized discount = $2151 (discount)

Carrying value = $79849 (issue price)

b. 06/30/2017:

Unamortized discount = $2151 - $358.5 = $1792.5

Carrying value = $79849 + $358.5 = $80207.5

c. 12/31/2017:

Unamortized discount = $1792.5 - $358.5 = $1434

Carrying value = $80207.5 + $358.5 = $80566

d. 06/30/2018:

Unamortized discount = $1434 - $358.5 = $1075.5

Carrying value = $80566 + $358.5 = $80924.5

e. 12/31/2018:

Unamortized discount = $1075.5 - $358.5 = $717

Carrying value = $80924.5 + $358.5 = $81283

f. 06/30/2019:

Unamortized discount = $717 - $358.5 = $358.5

Carrying value = $81283 + $358.5 = $81641.5

g. 12/31/2019:

Unamortized discount = $358.5 - $358.5 = $0

Carrying value = $81641.5 + $358.5 = $82000