Question

Stanford issues bonds dated January 1, 2017, with a par value of $258.000. The bonds' annual contract rate is 6%, 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 8%, and the bonds are sold for $244.471. 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 effective interest method to amortize the discount for these bonds Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the amount of the discount on these bonds at issuance? Discount Required 1 Required 2 >

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Answer 1

1) Discount on bonds payable = Face vale of the bonds payable - Issue price of the bonds payable Face vale of the bonds payable Issue price of the bonds payable Discount on bonds payable $258,000 $244,471 $13,529 ($258000 - $244471) 2) Face vale of the bonds payable Semiannual coupon rate Semiannual coupon payment Number of semiannuals to maturity Total coupon payment $258,000 3% 16% / 2 --> Annual rate is converted into semiannual rate] $7,740 ($258000 x 3%] 6 [3 years x 2 as there will be 2 semiannuals per year] $46,440 Total Bond Interest Expense Over Life of Bonds: Amount repaid: Coupon payment of $7,740 $46,440 [As calculated above] Par value at maturity $258,000 [Face value of the bonds] Total repaid $304,440 Less amount borrowed $244,471 Total bond interest expense $59,969 ($304440 - $244471)

3) Cash Interest Paid Bond Interest Expense Discount Unamortized Amortization Discount Carrying Value Semiannual Interest Period-End 01/01/2017 06/30/2017 12/31/2017 06/30/2018 12/31/2018 06/30/2019 12/31/2019 Total $7,740 $7,740 $7,740 $7,740 $7,740 $7,740 $46,440 $9,779 $9,860 $9,945 $10,033 $10,125 $10,226 $59,969 $2,039 $2,120 $2,205 $2,293 $2,385 $2,486 $13,529 $13,529 $11,490 $9,370 $7,165 $4,871 $2,486 $244,471 $246,510 $248,630 $250,835 $253,129 $255,514 $258,000 $0 NOTE: For 06/30/2017: Bond interest = $244471 x 4%; Discount amortized = $9779 - $7740 = $2039; Carrying value = $244471 + $2039 = $246510; For 12/31/2017: Bond interest = $246510 x 4%; Discount amortized = $9860 - $7740 = $2120; Carrying value = $246510 + $ 2120 = $248630; For 06/30/2018: Bond interest = $248630 x 4%; Discount amortized = $9945 - $7740 = $2205; Carrying value = $248630 + $2205 = $250835; For 12/31/2018: Bond interest = $250835 x 4%; Discount amortized = $10033 - $7740 = $2293; Carrying value = $250835 + $2293 = $253129; For 06/30/2019: Bond interest = $253129 x 4%; Discount amortized = $10125 - $7740 = $2385; Carrying value = $253129 + $2385 = $255514; For 12/31/2019: Bond interest = $255514 x 4%; Discount amortized = $10226 - $7740 = $2486; Carrying value = $255514 + $2486 = $258000.