Question

Stanford issues bonds dated January 1, 2017, with a par value of $251,000. The bonds’ annual contract rate is 10%, 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 12%, and the bonds are sold for $238,667

. 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 amortization table using the effective interest method to amortize the discount for these bonds.

• Required 3

Prepare an amortization table using the effective interest method to amortize the discount for these bonds. (Round all amounts to the nearest whole dollar.)

How much total bond interest expense will be recognized over the life of these bonds?

What is the amount of the discount on these bonds at issuance?

	Discount $12,333

	Total Bond Interest Expense Over Life of Bonds: Amount repaid: 6 payments of $12,550 $75,300 Par value at maturity 251,000 Total repaid 326,300 Less amount borrowed 238,667 Total bond interest expense $87,633

	Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Discount Amortization Unamortized Discount Carrying Value 01/01/2017 $12,333 $238,667 06/30/2017 $12,550 12/31/2017 12,550 06/30/2018 12,550 12/31/2018 12,550 06/30/2019 12,550 12/31/2019 12,550 12,550 0 Total $75,300 $87,633 $12,333

Answer 1

Solution 1:

Discount on bonds at issuance = $251000 - $238667 = $12,333

Solution 2:

Total bond interest expense over the life of bond
Particulars	Amount
Amount Repaid:
6 payments of ($251,000*10%*6/12=) $12550 each	$75,300
Par Value at Maturity	$2,51,000
Total Repaid	$3,26,300
Less: Amount borrowed	$2,38,667
Total bond interest expense	$87,633

Solution 3:

Bond Amortization Schedule
Period end	Cash Interest paid	Bond Interest Expense	Discount amortization	Unamortized Discount	Carrying value
01-Jan-17				$12,333	$2,38,667
30-Jun-17	$12,550	$14,320	$1,770	10,563	$2,40,437
31-Dec-17	$12,550	$14,426	$1,876	8,687	$2,42,313
30-Jun-18	$12,550	$14,539	$1,989	6,698	$2,44,302
31-Dec-18	$12,550	$14,658	$2,108	4,590	$2,46,410
30-Jun-19	$12,550	$14,785	$2,235	2,355	$2,48,645
31-Dec-19	$12,550	$14,906	$2,356	0	$2,51,000