Question

Dracut issued 100 000 of 8% 10 yr bonds payable on January 1 20x0 when the market interest rate was 10%. The company pays interest annually at year end.

1. Create spreadsheet model to prepare schedule to amortize the bond. Use effective interest method of amortization. (round to nearest dollar)

Answer 1

10 years Discount factor n= i=10% Year 1 0.90909 Present value Cash Flow Amount Year 2 0.82645 Interest Year 3 0.75131 ($100,000 x 8 %) 8,000 8000 x 6.144567 Year 4 0.68301 49,157 Year 5 0.62092 100,000 100000 x 0.38554 Principal S Year 6 0.56447 0.51316 38,554 Year 7 Year & 0.46651 Issue price of bond ($ 49157 38554) 87,711 Year 9 0.42410 Pdiscount on issue price of bond ($100000 877111) $ Year 10 12,289 0.38554 Amortization Schedule 6.14457 Date Interst expense Preceeding bond carrying Credit balance Interest payment= Debit Balance in the DISCOUNT in Bond Book value of Amortization account Bond discount 100,000X 8 %) Amount x 10 % Payable the bond D D-C C B-A A R F = E-D 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ S 87,711 Dec 31 20x0 12,289 8,000 $ 11,518 $ 10,670 $ Dec 31 20x1 8,771 771 88,482 8,000 $ 8,000 $ 848 $ Dec 31 20x2 8,848 S 89,330 8,933 $ Dec 31 20x3 S 933 9,737 90,263 1,026 S 8,000 S $ 9,129 $ 9,026 91,289 Dec 31 20x4 8,711 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8.000 $ 1,129 $ 1,242 $ 1,366 $ 1,503 $ 1,653 $ 7,582 $ 6,340 $ 4,974 $ 3,471 $ 1,818 $ Dec 31 20x5 92,418 9,242 $ 9,366 $ Dec 31 20x6 93,660 Dec 31 20x7 95,026 Dec 31 20x8 9,503 96,529 9,653 $ Dec 31 20x9 98,182 9,818 $ 100,000 Dec 31 20x10 1.818 C