Question

. Greer Industries issued $6,000,000 of 6% debentures on May 1, 2019 and received cash totaling $5,513,346. The bonds pay interest semiannually on May 1 and November 1. The firm uses the ef-fective-interest method of amortizing discounts and premiums. The bonds were sold to yield an ef-fective-interest rate of 8%. Complete the following table indicating the total dollar amount of discount or premium amortiza-tion during the first year these bonds were outstanding. Show computations and round to the near-est dollar. Amortization Table Carrying value Date Cash paid (A) Interest Expense (B) Amortization (A - B) November 1 May 1

Answer 1

Cash paid = Face value of the bond x Semi-annual Interest rate

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Under the effective interest method,

Interest expense to be recorded

= Carrying value at the beginning of the interest period x Semi annual effective interest rate

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Carring value = Carrying value at the beginning of the interest period - Amortization during the interest period

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Date	Cash paid (A)	Interest Expense (B)	Amortization (A - B)	Carrying value
November 1	$180,000 [Refer working note 1]	$220,534 [Refer working note 2]	$40,534	$5,553,880 [Refer working note 3]
May 1	$180,000 [Refer working note 1]	$222,155 [Refer working note 4]	$42,155	$5,596,035 [Refer working note 5]

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Working note 1 - Interest paid for the six months
Face value of the bond	$6,000,000
Semi-annual interest rate                [Annual interest / 2 = 6% / 2]	3%
Interest paid in cash                        [Face value x Semi - annual interest rate = $6,000,000 x 3%]	$180,000

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Working note 2 - Interest expense for the six months ended on October 31, 2019   (May 1, 2019 to October 31, 2019)
Carrying value of the bond at May 1, 2019	$5,513,346
Effective Interest rate                                                         [Annual interest / 2 = 8% / 2]	4%
Interest expense recorded on November 1, 2019               [Carrying value at May 1 x Effective Interest rate = $5,513,346 x 4%]	$220,534

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Working note 3 - Carrying Value of the bond at October 31, 2019 (or) November 1, 2019
Carrying value at May 1, 2019	$5,513,346
Add: Discount amortized [Refer the schedule]	$40,534
Carrying Value at November 1, 2019	$5,553,880

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Working note 4 - Interest expense for the six months ended on April 30, 2020   (November 1, 2019 to April 30, 2020)
Carrying Value at November 1, 2019	$5,553,880
Effective Interest rate                                                         [Annual interest / 2 = 8% / 2]	4%
Interest expense recorded on May 1, 2020                         [Carrying value at November 1 x Effective Interest rate = $5,553,880 x 4%]	$222,155

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Working note 4 - Carrying Value of the bond at April 30, 2020 (or) May 1, 2020
Carrying value at November 1, 2019	$5,553,880
Add: Discount amortized   [Refer the schedule]	$42,155
Carrying Value at May 1, 2020	$5,596,035

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