Question

On January 1, 2017, when the market interest rate was 14%, Luba Corporation issued bonds in the face amount of $500,000 with interest at 12% payable semiannually. The bonds mature on December 31, 2026. Use (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

Calculate the bond discount at issuance. How much of the discount should be amortized by the effective interest method on July 1, 2017? (Do not round intermediate calculations. Round final answers to the nearest whole dollars.)

Answer 1

Calculation of bond discount at issuance:

Annuity PVF at 7% for 20 periods = 10.59401

PVF at 7% for 20th period = 0.258419

Par value of bonds = 500,000

Semi annual interest in cash = 30,000

Present value of maturity value (500,000*0.258419)	129,209.5
Present value of interest (30,000*10.59401)	317,820.3
Issue price	447,030
Discount on bonds issuance (500,000-447,030)	52,970

Calculation of Discount on bonds amortized:

Interest expenses for the first period	31292
(447030*14%*6/12)
Less: Semi annual cash interest	30000
(500000*12%*6/12)
Discount on Bonds payable amortized	1292