Question

Lassen Corporation issued ten-year term bonds on January 1, 20x7, with a face value of $800,000. The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used.

Prepare a bonds amortization table for the first three periods.

Answer 1

Bonds amortization table for the first three periods:

Amortization Schedule (Effective interest)
Date	Cash interest	Interest expense	Discount Amortization	Carrying amount
Jan 1,20x7				$690,960
June 30, 20x7	$24,000	$27,638	$3,638	$694,598
Dec 31,20x7	$24,000	$27,784	$3,784	$698,382
June 30, 20x8	$24,000	$27,935	$3,935	$702,318

Cash interest = Face value x Interest rate = $800,000 x 3% [Semi-annual rate of 6% stated rate]

Interest expense = Preceding carrying amount x 4% [Semi-annual rate of 8% market rate]

Discount amortized = Interest expense - Cash interest

Carrying amount = Preceding carrying amount + Discount amortized