Question

ServersRus Inc. Issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180.

Using straight-line amortization:

1. How much is interest expense in 2017?
   
2. What will the carrying value of the bonds be on the December 31, 2017 balance sheet?
   
3. How much is interest expense for 2018?
   
4. What is the carrying value of the bonds on December 31, 2018?

Using effective-interest amortization:

1. How much is interest expense in 2017?

2. What will the carrying value of the bonds be on the December 31, 2017 balance sheet?

3. How much is interest expense in 2018?

4. What will the carrying value of the bonds be on the December 31, 2018 balance sheet?

Answer 1

	Straight line
1)	Discount on bonds
	Face value				25,000,000
	issue price				-24,505,180
	Discount on bonds				494,820
	discount on bonds		494,820/40
			12370.5
	interest expense
	Cash interest		(25,000,000*7.8%)=		1950000
	Add discount on bonds				24741
	interest expense				1974741	answer
2)	Carrying value of bonds
	issue price				24,505,180
	Add amortized discount (12370.5*4)				24741
	Carrying value of bonds				24,529,921	answer
3)	interest expense in 2018				1974741	answer
4)	Carrying value of bonds
	issue price				24,505,180
	Add amortized discount (12370.5*6)				74223
	Carrying value of bonds				24,579,403	answer
	Effective interest method
	year	cash	interest	Discount	Carrying
		interest	expense	amortized	value
	1/1/2016				24,505,180
	6/30/2016	975000	980207	5207	24510387
	12/31/2016	975000	980415	5415	24515803
	6/30/2017	975000	980632	5632	24521435
	12/31/2017	975000	980857	5857	24527292
	6/30/2018	975000	981092	6092	24533384
	12/31/2018	975000	981335	6335	24539719
1)	interest expense			1961489
2)	Carrying value			24527292
3)	interest expense			1962427
4)	Carrying value			24539719