Question

Tano issues bonds with a par value of $83,000 on January 1, 2017. The bonds’ annual contract rate is 10%, 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 12%, and the bonds are sold for $78,922.
  
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 straight-line method to amortize the discount for these bonds.

Answer 1

Req 1.
Par value of bonds			83000
Less: Issue price			78922
Total discount			4078
Req 2.
6 payments of 4150			24900
Add: Maturity value			83000
Total repayment			107900
Less: Amount borrowed			78922
Total Interest expense			28978
Req 3.
Period	Cash int	Discount	Interest	Discount	Carrying
		amortized	Expense	unamortized	value
01.01.17				4078	78922
30.06.17	4150	679.67	4829.67	3398.33	79601.67
31.12.17	4150	679.67	4829.67	2718.66	80281.34
30.06.18	4150	679.67	4829.67	2038.99	80961.01
31.12.18	4150	679.67	4829.67	1359.32	81640.68
30.06.19	4150	679.67	4829.67	679.65	82320.35
31.12.19	4150	679.65	4829.65	0	83000