Question

Check my work Exercise 14-18B Effective Interest: Amortization of bond discount LO P5 Stanford issues bonds dated January 1, 2019, with a par value of $258,000. The bonds' annual contract rate is 6%, 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 $244,471. 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. ces 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 Required 1 Required 2 >

Answer 1

1) Discount = Par Value - Selling Price = $258,000 - $244,471 = $13,529 Total Bond Interest Expense Over Life of Bonds: Amount repaid: payments of $7,740 $46,440 Par value at maturity $258,000 Total repaid $304,440 Less amount borrowed $244,471 Total bond interest expense $59,969 Semi-annual interest payment: Par Value $258,000 Contract rate 6% $258,000 x 6% = $15,480 # of payments per year 2 Semi-annual payment = $7,740

Semiannual Interest Period-End Cash Interest Paid Bond Interest Discount Expense Amortization Unamortized Discount Carrying Value 01/01/2019 $13,529 $244,471 06/30/2019 $7,740 $9,779* $2,039** $11,490*** $246,510 (a) 12/31/2019 $7,740 $9,860 $2,120 $9,370 $248,630 06/30/2020 $7,740 $9,945 $2,205 $7,165 $250,835 12/31/2020 $7,740 $10,033 $2,293 $4,872 $253,128 06/30/2021 $7,740 $10,125 $2,385 $2,487 $255,513 12/31/2021 $7,740 $10,227 $2,487 $0 $258,000 Total $46,440 $59,969 $13,529 $244,471 x (8%/2) = $9,779* $9,779 - $7,740 = $2,039** $13,529 - $2,039 = $11,490 $258,000 - $11,490 = $246,510 (a)