Exercise 10-2 Straight-Line: Amortization of bond discount LO P2 Tano issues bon
ID: 2525494 • Letter: E
Question
Exercise 10-2 Straight-Line: Amortization of bond discount LO P2
Tano issues bonds with a par value of $98,000 on January 1, 2017. The bonds’ annual contract rate is 7%, 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 10%, and the bonds are sold for $90,537.
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 straight-line method to amortize the discount for these bonds.
I am stuck on the 3rd question!
Explanation / Answer
Tano issues bonds
Amount of discount = par value – issue value
Discount = $98,000 - $90,537 = $7,463
Interest expense = 98,000 x7% x 6/12 = $3,430
Total interest amount for 6 semiannual periods = 6 x 3,430
= $20,580
Add: par value at maturity $98,000
Total repaid$118,580
Less: Bond issue value$90,537
Total bond interest expense$28,043
The difference between interest expense and total interest amount = $28,043 - $20,580 = $7,463
Semiannual periods
Unamortized Discount
Carrying Value
1-Jan-17
$7,463
$90,537
30-Jun-17
$6,219
$91,780
31-Dec-17
$4,975
$93,024
30-Jun-18
$3,731
$94,268
30-Dec-18
$2,487
$95,512
30-Jun-19
$1,244
$96,756
Dec 30 ,19
$0
$98,000
Computations –
The unamortized discount of $7,463 is amortized over the 6 periods (3years x 2 semiannual interest payment periods) using the straight line amortization.
Hence, the amortized discount amount for each semiannual interest period = 7,463/6 = $1,244
With each passing semiannual period the balance in the unamortized discount gets reduced, while the carrying value of the bond increases with the same amount to reach the par value at the time of maturity.
Semiannual periods
Unamortized Discount
Carrying Value
1-Jan-17
$7,463
$90,537
30-Jun-17
$6,219
$91,780
31-Dec-17
$4,975
$93,024
30-Jun-18
$3,731
$94,268
30-Dec-18
$2,487
$95,512
30-Jun-19
$1,244
$96,756
Dec 30 ,19
$0
$98,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.