Question

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 96 offering a 4% discount. They had a 20 year term, a stated rate of interest of 7%, and an effective rate of interest of 7.389%. Assuming Residence uses the effective interest rate method, the book value of the bond liability on December 31, Year 2 is (round any necessary computations to the nearest whole dollar) |

Answer #1

Face Value = $50,000

Issue Price = $50,000 * 96 % = $48,000

Cash interest paid per annum = $50,000 * 7 % = $3,500

Interest Expense for Year 1 = $48,000 * 7.389% = $3,547

Discount Amortize for Year 1 = Interest Expense for Year 1 - Cash interest paid = $3,547 - $3,500 = $47

Book value of the bond liability on December 31, Year 1 = Issue Price + Discount Amortize for Year 1

= $48,000 + $47 = $48,047

Interest Expense for Year 2 = $48,047 * 7.389% = $3,550

Discount Amortize for Year 2 = $3,550 - $3,500 = $50

**Book value of the bond liability on December 31, Year
2**

= Book value of the bond liability on December 31, Year 1 + Discount Amortize for Year 2

= $48,047 + $50 = $48,097

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