Question

E10-15 (Algo) Preparing a Bond Amortization Schedule for a Bond Issued at a Premium and Determining Reported Amounts LO10-5 On January 1 of this year, Houston Company issued a bond with a face value of $15,000 and a coupon rate of 6 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. Houston uses the effective interest amortization method. (FV of $1. PV of $1. EVA of $1, and PVA of $11 (Use the appropriate factor(s) from the tables provided. Round your final answers to whole dollars.) Required: 1. Complete a bond amortization schedule for all three years of the bond's life. (Enter all values as positive values.) Cash interest interest Expense Amortization Book Value of Bond Jan. 01, Year 1 Dec. 31. Year 1 Dec 31, Year 2 Dec. 31. Year

Answer 1

Correct Answer:

Requirement 1:

Effective Interest Amortization Table
Formula Used	(15,000*6%)	Last year’s Carrying value of bond* Market Rate of Interest (5%)	Cash interest - Interest Expense	Last year's Carrying value of Bond - current year's Premium amortized
Date	Cash interest	Interest Expense	Amortization	Book value of Bond
Jan 01, Year 1		-	-	$                   15,408
Dec 31, Year 1	$ 900.0	$                 770	$ 130	$                   15,279
Dec 31, Year 2	$ 900.0	$                 764	$ 136	$                   15,143
Dec 31, Year 3	$ 900.0	$                 757	$ 143	$                   15,000

Requirement 2:

Dec-31	Year 1	Year 2
Interest Expense	$ 770	$ 764
Bond liability	$ 15,279	$ 15143

Working:

Annually		Formula Applied
Face Value of Bond	$ 15,000
Interest Semi-Annually @ 6%	$ 900	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® (5%)	0.050	5%
Time Period (n) 3 years	3.00	3
Present Value of Face Value of Bond	$ 12,957.56398	Face Value/(1+r%)^2n
Present Value of Interest payment	$ 2,450.92	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$ 15,408	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$ 408	Issue Price - Face Value of Bonds

End of answer.

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