Question

(Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.

On June 30, 2017, Hobart Company issued $2,000,000facevalueof11$2,171,600, a yield of 10%. Hobart Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.

Short answer

The balance of the unamortized schedule on 30 June 2019 is$165,479.

Step-by-step solution

Definition of Bond Amortization

Bond amortization refers to a method used by the business entity to spread the discount or the premium on the bonds payable over its life. Generally, two bond amortization methods are straight-line and effective interest methods.

Amortization Schedule

Date	Interest payment at the stated rate on face value (5.5%)	Interest expenses at the market rate on the previous year book value (5%)	Amortized premium	Unamortized premium	Bond payable	Book value of bond payable
30 June 2017				$171,600	$2,000,000	$2,171,600
31 Dec 2017	$110,000	$108,580	$1,420	$170,180	$2,000,000	$2,170,180
30 June 2018	$110,000	$108,509	$1,491	$168,689	$2,000,000	$2,168,689
31 Dec 2018	$110,000	$108,434	$1,566	$167,123	$2,000,000	$2,167,123
30 June 2019	$110,000	$108,356	$1,644	$165,479	$2,000,000	$2,165,479