Santa Corporation issued a bond on January 1 of this year with a face value of $1,000. The bond's coupon rate is 7 percent and interest is paid once a year on December 31. The bond matures in three years. The annual market rate of interest was 11 percent at the time the bond was sold. The following amortization schedule pertains to the bond issued:
| Cash Paid |
Interest Expense |
Amortization | Balance | |
| January 1, Year 1 | $902 | |||
| December 31, Year 1 | $70 | $99 | $29 | 931 |
| December 31, Year 2 | 70 | 102 | 32 | 963 |
| December 31, Year 3 | 70 | 107 | 37 | 1,000 |
Required:
1. What was the bond's issue price?
2. Did the bond sell at a discount or a premium? How much was the premium or discount?
3. What amount(s) should be shown on the balance sheet for bonds payable at the end of Year 1 and Year 2?
4. Show how the following amounts were computed for Year 2: (a) $70, (b) $102, (c) $32, and (d) $963.
Answer:1
Issue price of the bond = Face Value - Amortization Cost
Total of amortisation for 3 years 29 + 32 + 37 = 98
Bonds issue price = 1000 - 98 = $ 902
Answer:2
Bond is issued on discount as Its Issue price is less than its Face Value. The amont of Discount will be:
| Face Value | 1000 |
| Issue Price | 902 |
| Discount | 98 |
Answer: 3
For bonds payable, carrying amount of bonds willl be shown in balance sheet at the end of the year.
Carrying amount of bond = Issue price + Discount amortized till date
Therefore,
Bond value at end of year 1 = 902 + 29 = $931
year 2 = 902 + 29 + 32 = $963
Answer: 4
Cash paid = Face Value * Bond's coupon rate
= $1000 * 7%
=$70
Interest Expense = Carrying value at beginning * Market interest rate
= $931 * 11%
= $102
Amortization = Interest Expense - Interest cash paid
= $102 - $70
= $32
Balance = Opening Balance + Interest amortized
= $931 + $32
= $963
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