Question

The Company sold $2,500,000 of 8 percent, five-year bonds on January 1, 2011, and would pay interest semiannually, on June 30 and December 31 of each of the five years. It sold the bonds on January 1, 2011, at 96 because the market rate of interest for similar investments was 9 percent. It decided to amortize the bond discount by using the effective interest method.

15. With regard to the bond issue on January 1, 2011, how much cash is received?

16. With regard to the bond issue on January 1, 2011, how much is bond discount?  

17. With regard to the bond interest payment on December 31, 2011, how much cash is paid in interest?

18. With regard to the bond interest payment on December 31, 2011, how much is the amortization?

19. With regard to the bond interest payment on December 31, 2011, how much is interest expense?

Answer 1

15. Cash received = 2,500,000 *96 /100 = 2,400,000

16. Bond discount = 2,500,000- 2,400,000 = 100,000

17. Cash paid in interest = 2,500,000 *8% *1/2 = 100,000

18. Amortization on Dec 31,2011 = 8360

19. Interest expense on Dec 31,2011 = 108360

Workings:

Semiannual interest payment date	Carrying value at beginning of period	Semiannual interest expense [Carrying value *9%*1/2]	Semiannual interest payment [2,500,000*8%*1/2]	Amortization of discount [Interest expense - Interest payment]	Unamortized bond discount at the end of period	Carrying value at end of period
Jan 1,2011					100000.00	2400000
June 30,2011	2400000	108000	100000	8000	92000.00	2408000
Dec 31,2011	2408000	108360	100000	8360	83640.00	2416360