44. Coffman Company sold bonds with a face value of $1,000,000 for $940,000. The

Question

44. Coffman Company sold bonds with a face value of $1,000,000 for $940,000. The bonds have a coupon rate of 10 percent, mature in 10 years, and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January1 of this vear. Coffman uses the effective-interest amortization method. Assume an annual market rate of interest of 11 percent. The amount of discount amortization at the first semi-annual interest date would be: A) S 50,000. B) $51,700. C) $3,000. D) $1,700. E) None of the above is correct.

Explanation / Answer

A B C D E F G Year Date Interest Payments Interest Expense Amortization of Bond Discount Debit Balance in the account Bond account Credit Balance in the account Bond Payable Book Value of Bonds FV*5% Mkt 5.5%* PreBV in G C-B Jan-01 60000 1000000 940000 Year 1 Jun-30 50000 51700 1700 58300 1000000 941700 Dec-31 50000 51794 1794 56507 1000000 943494 Year 2 Jun-30 50000 51892 1892 54614 1000000 945386 Face Value 1000000 Dec-31 50000 51996 1996 52618 1000000 947382 Issue Value 940000 Year 3 Jun-30 50000 52106 2106 50512 1000000 949488 Discount Value 60000 Dec-31 50000 52222 2222 48290 1000000 951710 Year 4 Jun-30 50000 52344 2344 45946 1000000 954054 Coupon rate 10% Dec-31 50000 52473 2473 43473 1000000 956527 Year to Maturity 10 Year 5 Jun-30 50000 52609 2609 40864 1000000 959136 Market Rate 11% Dec-31 50000 52752 2752 38112 1000000 961888 Year 6 Jun-30 50000 52904 2904 35208 1000000 964792 Interest PA 100000 Dec-31 50000 53064 3064 32144 1000000 967856 Semi Annual 50000 Year 7 Jun-30 50000 53232 3232 28912 1000000 971088 Dec-31 50000 53410 3410 25503 1000000 974497 Year 8 Jun-30 50000 53597 3597 21905 1000000 978095 Dec-31 50000 53795 3795 18110 1000000 981890 Year 9 Jun-30 50000 54004 4004 14106 1000000 985894 Dec-31 50000 54224 4224 9882 1000000 990118 Year 10 Jun-30 50000 54456 4456 5425 1000000 994575 Dec-31 50000 54702 5425 0 1000000 1000000 1000000 1059276 60000 From the above table, Amortzation of Discount at first semi annual is Rs. 1700. So answer is D(1700)

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