Question

Stanford issues bonds dated January 1, 2017, with a par value of $241,000. The bonds’ annual contract rate is 8%, 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 10%, and the bonds are sold for $228,764.
  
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.

Answer 1

Req 1.
Par value of Bonds			241000
Less: Issue pricce of Bonds			228764
Discount on Bonds payable			12236
Req 2:
Total Interest expense
6 payments of $ 9640			57840
	(241000*8%*6/12)
Maturity value of bonds			241000
Total Repayment			298840
Less: Amount borrowed			228764
Total Interest expense			70076
Req 3:
Amort Chart:
Date	Cash Int	Interest	Discount	Unamortized	Carrying
		Expense	Amortized	Discount	Value of bonds
01.01.17				12236	228764
30.6.17	9640	11438	1798	10438	230562
31.12.17	9640	$11,528	$1,889	$8,549	$232,451
30.06.18	9640	$11,623	$1,984	$6,565	$234,435
31.12.18	9640	$11,722	$2,083	$4,482	$236,518
30.06.19	9640	$11,826	$2,187	$2,295	$238,705
31.12.19	9640	$11,935	$2,295	$0	$241,000