Question

Tano issues bonds with a par value of \(180,000 on January 1, 2017. The bonds’ annual contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 10%, and the bonds are sold for \)170,862.

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 like the one in Exhibit 10.7 for these bonds; use the straight-line method to amortize the discount

Short answer

(1) Discount on bond equals $9,138.

(2) Total interest expense equals $52,518.

(3) Amortization table is prepared in Step 3.

Step-by-step solution

(1) Discount on Bond at Issuance

$\begin{array}{rcl}\mathbf{Discount}\mathbf{}\mathbf{on}\mathbf{}\mathbf{Bond}\mathbf{}\mathbf{payable}& \mathbf{=}& \mathbf{Par}\mathbf{}\mathbf{value}-\mathbf{Issue}\mathbf{}\mathbf{Price}\\ & \mathbf{=}& \mathbf{\$}\mathbf{180}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{862}\\ & \mathbf{=}& \mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{138}\\ & & \end{array}$

(2)Total Bond interest expense

Six payments of $7,200 (6 payments × [$ 180,000 × 0.08 × 1∕2 yr]	$ 43,200
Plus Discount	$ 9,138
Total bond interest expense	$ 52,338

:Amortization table - straight-line method

Bonds: $180,000 Par Value, Semi -annual Interest Payments, Three-Year Life, 4% Semi-annual Contract Rate, 5% Semi-annual Market Rate
Semi-annual Interest Period-End	(A) Cash Interest Paid 4% × $180,000	Bond Interest Expense	(C) Discount Amortization ($9,138 / 6)	(D) Unamortized Discount Prior (D) – (C)	(E) Carrying Value $180,000 – (D)
01/01/2017				$9,138	$ 170,862
30/06/2017	$ 7,200	$ 8,723	$ 1,523	$ 7615	$ 172,385
31/12/2017	$ 7,200	$ 8,723	$ 1,523	$ 6,092	$ 173,908
30/06/2018	$ 7,200	$ 8,723	$ 1,523	$,4,569	$ 175,431
31/12/2018	$ 7,200	$ 8,723	$ 1,523	$ 3,046	$ 176,954
30/06/2019	$ 7,200	$ 8,723	$ 1,523	$ 1,523	$ 178,477
31/12/2019	$ 7,200	$ 8,723	$ 1,523	-	$ 180,000