Question

A company sells a 6-year, 6% bond with a par value of $100,000 when the market is 8% for $90,615 The bond requires semi-annual interest payments of $3,000. Using the effective interest amortization method, the company will recognize _____ for the amortization of the discount on the first semi-annual interest payment.

Answer 1

Carrying value of bonds = $90,615

First semi annual interest expense = Carrying value of bonds x Market interest rate x 6/12

= 90,615 x 8% x 6/12

= 3,624.60

Semi annual interest payment = $3,000

Amortization of discount on first semi annual interest payment = First semi annual interest expense - Semi annual interest payment

= 3,624.60-3,000

= $624.60

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