Question

On January 1 of this year, Ikuta Company issued a bond with a face value of $160,000 and a coupon rate of 4 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 5 percent. Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required: 1. Complete a bond amortization schedule for all three years of the bond's life Cash Interest Interest Expense Discount Book Value of Amortization Date Bond Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2? Year 2 December 31 Interest expense Bond liability Year 1

Answer 1

1)
	Year		Cash Interest		Interest Expense		Dicount amortization			Book Value of bond
	Jan 01, Year 1									$       1,55,643
	Dec 31, Year 1		$                        6,400		$             7,782		$       1,382			$       1,57,025
	Dec 31, Year 2		$                        6,400		$             7,851		$       1,451			$       1,58,476
	Dec 31, Year 3		$                        6,400		$             7,924		$       1,524			$       1,60,000
Working:
a.	When Bonds are issued at below their par value, it is called as bond issued at discount.
	Par Value of Bond				$ 1,60,000.00
	Current price of bond				$ 1,55,642.80
	Discount on bonds payable				$       4,357.20
b.	Cash Interest		=	Par Value x Coupon rate
			=	$ 1,60,000.00	x	4%
			=	$       6,400.00
c.	Interest expense as per effective Interest method,
	Year		Beginning Book Value		Market Interest Rate		Interest Expense
	Dec 31, Year 1		$            1,55,642.80		5%		$ 7,782.14
	Dec 31, Year 2		$            1,57,024.94		5%		$ 7,851.25
	Dec 31, Year 3		$            1,58,476.19		5%		$ 7,923.81
d.	Calculation of current price of bond
	Price of bond is the present value of cash flow from bond.
	At 5% market required return:
	Year	Cash flow	Discount factor		Present Value
	1-3	$       6,400	2.7232		$     17,428.79
	3	$ 1,60,000	0.8638		$ 1,38,214.02
	Current Price				$ 1,55,642.80
e	Present Value of annuity of 1			=	(1-(1+i)^-n)/i			Where,
				=	(1-(1+0.05)^-3)/0.05			i	5%
				=	2.7232			n	3
f	Present Value of 1			=	1.05^-3
				=	0.8638
g.	Coupon Interest paid in cash			=	Par Vale x coupon rate
				=	$       1,60,000	x	4%
				=	$             6,400
2)				Year 1	Year 2
		December 31
		Interest Expense		$             7,782	$             7,851
		bond Liability		$       1,57,025	$       1,58,476