Question

Stanford issues bonds dated January 1, 2017, with a par value of $240,000. The bonds’ annual contract rate is 9%, 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 $222,307.
  
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

1. Bond discount = $240,000 - $222,307

= $17,693

2. Total interest expense = $17,693 + ($240,000 * 4.5% * 6)

= $82,493

3.

Period	Effective interest @ 6% of carrying value	Interest paid @ 4.5% of $240,000	Plug for discount amortization	Bonds carrying value
0				$222,307
1	$13,338.42 ($222,307*6%)	$10,800	$2,538.42	224,845.42
2	$13,490.73 ($224,845.42*6%)	$10,800	$2,690.73	$227,536.15
3	$13,652.17 ($227,536.15*6%)	$10,800	$2,852.17	$230,388.32
4	$13,823.30 ($230,388.32*6%)	$10,800	$3,023.3	$233,411.62
5	$14,004.70 ($233,411.62*6%)	$10,800	$3,204.7	$236,616.32
6	$14,196.98 ($236,616.32*6%)	$10,800	$3,396.98	$240,013.3

* The difference of $13.3 is due to rounding off