Question

Tano issues bonds with a par value of $180,000 on January 1, 2017. 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 $170,862.

What is the amount of the discount on these bonds at issuance?

How much total bond interest expense will be recognized over the life of these bonds?

Prepare an amortization table like the one in Exhibit 14.7 for these bonds; use the straight-line method to amortize the discount.

Answer 1

1
Discount	9138	=180000-170862
2
Total interest expense over life of bonds
6 payments of $ 7200	43200
Par value at maturity	180000
Total repaid	223200
Less: Amount borrowed	170862
Total bond interest expense	52338
3
Semiannual Interest period end	Unamortized Discount	Carrying value
01/01/2017	9138	170862
06/30/2017	7615	172385
12/31/2017	6092	173908
06/30/2018	4569	175431
12/31/2018	3046	176954
06/30/2019	1523	178477
12/31/2019	0	180000
Workings:
Semi-annual interest payment	7200	=180000*8%/2
Semi-annual discount amortization	1523	=9138/6