Question

Exercise 10-18B Effective Interest: Amortization of bond discount LO P5 Stanford issues bonds dated January 1, 2019, with a par value of $252,000. 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 $245,391. 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. 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 $ 6,609

Answer 1

1
Discount	6609	=252000-245391
2
Total interest expense over life of bonds
6 payments of $ 8820	52920
Par value at maturity	252000
Total repaid	304920
Less: Amount borrowed	245391
Total bond interest expense	59529
3
Semiannual Interest period end	Cash interest paid	Bond Interest expense	Discount amortization	Unamortized Discount	Carrying value
01/01/2019				6609	245391
06/30/2019	8820	9816	996	5613	246387
12/31/2019	8820	9855	1035	4578	247422
06/30/2020	8820	9897	1077	3501	248499
12/31/2020	8820	9940	1120	2381	249619
06/30/2021	8820	9985	1165	1216	250784
12/31/2021	8820	10036	1216	0	252000
Total	52920	59529	6609
Workings:
Cash interest paid	8820	=252000*7%*6/12
	Bond Interest expense
06/30/2019	9816	=245391*8%*6/12
12/31/2019	9855	=246387*8%*6/12
06/30/2020	9897	=247422*8%*6/12
12/31/2020	9940	=2458499*8%*6/12
06/30/2021	9985	=249619*8%*6/12
12/31/2021	10036	=250784*8%*6/12