E10-15 (Supplement 10B) Recording the Effects of a Discount Bond Issue and First

Question

E10-15 (Supplement 10B) Recording the Effects of a Discount Bond Issue and First Interest Payment and Preparing a Discount Amortization Schedule (Effective-Interest Amortization) [LO 10-S2] [The following information applies to the questions displayed below. On January 1, when the market interest rate was 10 percent, Seton Corporation completed a $240,000, 9 percent bond issue for $225,243. The bonds pay interest each December 31 and mature in 10 years. Assume Seton Corporation uses the effective-interest method to amortize the bond discount.

Explanation / Answer

Discount bond amortization Changes during the period Changes during the period Period Ended Interest Expenses Cash Paid Discount amortized Bonds Payable Discount on bonds payable Carrying Value Start $          2,40,000 $                                        14,757 $          2,25,243 Yr 1 End                                           22,524        21,600                                    924              2,40,000                                            13,833              2,26,167 Yr 2 End                                           22,617        21,600                                1,017              2,40,000                                            12,816              2,27,184 Yr 3 End                                           22,718        21,600                                1,118              2,40,000                                            11,698              2,28,302 Yr 4 End                                           22,830        21,600                                1,230              2,40,000                                            10,467              2,29,533 Yr 5 End                                           22,953        21,600                                1,353              2,40,000                                              9,114              2,30,886 Yr 6 End                                           23,089        21,600                                1,489              2,40,000                                              7,625              2,32,375 Yr 7 End                                           23,237        21,600                                1,637              2,40,000                                              5,988              2,34,012 Yr 8 End                                           23,401        21,600                                1,801              2,40,000                                              4,187              2,35,813 Yr 9 End                                           23,581        21,600                                1,981              2,40,000                                              2,205              2,37,795 Yr 10 End                                           23,805        21,600                                2,205              2,40,000                                                     -0              2,40,000 Working: Current Proceeds from the issuance of bond is the present value of cash flow from bond -(a) Coupon Interest and (b) Face Value Pesent Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.10)^-10)/0.10 i 10% =                              6.1446 n 10 Present Value of 1 = (1+i)^-n = (1+0.10)^-10 =                              0.3855 Total Proceeds from the issuance of bond                                  2,25,243.00 Less Present Value of face value of bond                    2,40,000.00 x 0.3855                                      92,530.39 Present Value of annual coupon                                  1,32,712.61 / Present Value of annuity of 1                                            6.1446 Annual coupon payment                                      21,598.37 Now, Annual coupon rate = Annual coupon payment / Face Value of Bond =                        21,598.37 /                                  2,40,000.00 = 8.99932% Thus, Exact amount of annual coupon =                          2,40,000 x 9.00% =                              21,600

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