Question

Read the problem. Identify and list the following data relevant to preparing an amortization schedule: Face amount Discount or premium Carrying value (Price of bonds) Term (years) Number of Periods Stated rate of interest (annual %) Stated rate per period Market rate of interest (annual %) Market rate per period The ABC Company issued $800,000 face value, 6%, 10 year bonds on January 1, 2015, with bond interest payments each June 30 and December 31. The bonds sold for $691,287 when the market rate of interest was 8%. II. Prepare a bond amortization schedule using the effective interest method to amortize the bond discount or premium To enter the data into the amortization schedule, copy the data from the "data" section. • Enter formulas to compute: Cash interest paid Interest expense Discount amortization Unamortized discount Carrying Value Include headers in the amortization schedule to label each column • When completing the problem enter formulas into all cells requiring you to perform mathematical functions. DO NOT enter the dollar amounts directly into those cells.

Answer 1

The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised.

M 3 Face Amount $800,000 4 Discount or Premuim $108,713 5 Carrying Value (Price of the $691,287 6 Terms (Year) 7 Number of Period 20 8 State Rate of Interest 6% 9 Stated rate per period 10 Market rate of interest 8% 11 Market rate per period 4% 12 13 Amortisation schedule (Effective Interest Method) Opening Date Cash Interest Paid book Balance 3% Interest Expense Discount Amortisation Unamortised Closing Book Amount Value 14 (A) Computation $800000 x 3% Cell Reference (B) Computation (A) x 11%/2 Cell Reference (C) Computation (D)= (C)-(B) (A)-(C)-(B) 16 17 18 19 20 21 1-Jan-15 30-Jun-15 31-Dec-15 30-Jun-16 31-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 $691,287 ($800000 x 3%] $C$3*$C$9 $694,938 ($ 800000 x3%] $C$3*$C$9 $698,736 [$800000 x3%] $C$3*$C$9 $702,685 [$800000 x 3%] $C$3*$C$9 $706,792 [$800000 x3%] $C$3*$C$9 $711,064 ($800000 x39] $C$3*$C$9 $715,507 ($800000 x3%) $C$3*$C$9 $24,000 ($691287 x4%] ROUND(B17*$C$11,0) $24,000 [$694938 x4%] ROUND(B18*$C$11,0) $24,000 $698736 x4%] ROUND(B19*$C$11,0) $24,000 [$702685 x 4%] ROUND(B20*$C$11,0) $24,000 $706792 x4%] ROUND(B21*$C$11,0), $24,000 ($711064 x4%] ROUND(B22*$C$11,0) $24,000 ($715507 x4%] ROUND(B23*$C$11,0)| $27,651 $27,798 $27,949 $28,107 $28,272 $28,443 $28,620 ($27651-$24000] [$27798-$24000] [$27949-$24000] ($28107-$24000] [$28272-$24000] [$28443-$24000] $28620-$24000] H17-E17 H18-E18 H19-E19 H20-E20 H21-E21 H22-E22 H23-E23 $3,651 $3,798 $3,949 $4,107 $4,272 $4,443 $4,620 $108,713 $105,062 $101,264 $97,315 $93,208 $88,936 $84,493 $79,873 $691,287 $694,938 $698,736 $702,685 $706,792 $711,064 $715,507 $720,127 22 23

24 25 26 27 28 29 30 31 32 33 34 35 36 31-Dec-18 30-Jun-191 31-Dec-19 30-Jun-20 31-Dec-20 30-Jun-21 31-Dec-21 30-Jun-22 31-Dec-22 30-Jun-23 31-Dec-23 30-Jun-24 31-Dec-24 $720,127 ($ 800000 x3%] $C$3*$C$9 $724,932 [$800000 x3] $C$3*$C$9 $729,929 ($800000 x39] $C$3*$C$9 $735,126 ($800000 x 3%] $C$3*$C$9 $740,531 ($800000 x3%] $C$3*$C$9 $746,152 ($800000 x 3%] $C$3*$C$9 $751,998 ($800000 x39] $C$3*$C$9 $758,078 ($800000 x 3%] $C$3*$C$9 $764,401 [$800000 x 3%] $C$3*$C$9 $770,977 ($800000 x39] $C$3*$C$9 $777,816 ($800000 x3%] $C$3*$C$9 $784,929 ($ 800000 x3%] $C$3*$C$9 $792,326 [$800000 x3%] $C$3*$C$9 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $720127 x4%] ROUND(B24*$C$11,0) $724932 x4%] ROUND(B25*$C$11,0) $729929 x4%] ROUND(826*$C$11,0) $735126 x 4%] ROUND(B27*$C$11,0) $740531 x4%] ROUND(B28*$C$11,0) [$746152 x4%] ROUND(B29*$C$11,0) $751998 x4%] ROUND(B30*$C$11,0) $758078 x4%] ROUND(B31*$C$11,0) $764401 X4%] ROUND(B32*$C$11,0) [$770977 x4%] ROUND(B33*$C$11,0) $777816 x4%] ROUND(B34*$C$11,0) $784929 x4%] ROUND(B35*$C$11,0) $792326 x4%] ROUND(B36*$C$11,0) $28,805 [$28805-$24000] $28,997 ($28997-$24000] $29,197 ($29197-$24000] $29,405 [$29405-$24000] $29,621 [$29621-$24000] $29,846 ($29846-$24000] $30,080 [$30080-$24000] $30,323 [$30323-$24000] $30,576 ($30576-$24000] $30,839 [$30839-$24000] $31,113 [$31113-$24000] $31,397 [$31397-$24000] $31,674 [$31674-$24000] H24-E24 H25-E25 H26-E26 H27-E27 H28-E28 H29-E29 H30-E30 H31-E31 H32-E32 H33-E33 H35-E34 H35-E35 H36-E36 $4,805 $4,997 $5,197 $5,405 $5,621 $5,846 $6,080 $6,323 $6,576 $6,839 $7,113 $7,397 $7,674 $75,068 $70,071 $64,874 $59,469 $53,848 $48,002 $41,922 $35,599 $29,023 $22,184 $15,071 $7,674 $724,932 $729,929 $735,126 $740,531 $746,152 $751,998 $758,078 $764,401 $770,977 $777,816 $784,929 $792,326 $800,000