E10-15 (Supplement 10B) Recording the Effects of a Discount Bond Issue and First
ID: 2400499 • Letter: E
Question
E10-15 (Supplement 10B) Recording the Effects of a Discount Bond Issue and First Interest Payment and Preparing a Discount Amortization Schedule (Effective-Interest Amortization) [LO 10-S2] [The following information applies to the questions displayed below. On January 1, when the market interest rate was 10 percent, Seton Corporation completed a $240,000, 9 percent bond issue for $225,243. The bonds pay interest each December 31 and mature in 10 years. Assume Seton Corporation uses the effective-interest method to amortize the bond discount.Explanation / Answer
Discount bond amortization Changes during the period Changes during the period Period Ended Interest Expenses Cash Paid Discount amortized Bonds Payable Discount on bonds payable Carrying Value Start $ 2,40,000 $ 14,757 $ 2,25,243 Yr 1 End 22,524 21,600 924 2,40,000 13,833 2,26,167 Yr 2 End 22,617 21,600 1,017 2,40,000 12,816 2,27,184 Yr 3 End 22,718 21,600 1,118 2,40,000 11,698 2,28,302 Yr 4 End 22,830 21,600 1,230 2,40,000 10,467 2,29,533 Yr 5 End 22,953 21,600 1,353 2,40,000 9,114 2,30,886 Yr 6 End 23,089 21,600 1,489 2,40,000 7,625 2,32,375 Yr 7 End 23,237 21,600 1,637 2,40,000 5,988 2,34,012 Yr 8 End 23,401 21,600 1,801 2,40,000 4,187 2,35,813 Yr 9 End 23,581 21,600 1,981 2,40,000 2,205 2,37,795 Yr 10 End 23,805 21,600 2,205 2,40,000 -0 2,40,000 Working: Current Proceeds from the issuance of bond is the present value of cash flow from bond -(a) Coupon Interest and (b) Face Value Pesent Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.10)^-10)/0.10 i 10% = 6.1446 n 10 Present Value of 1 = (1+i)^-n = (1+0.10)^-10 = 0.3855 Total Proceeds from the issuance of bond 2,25,243.00 Less Present Value of face value of bond 2,40,000.00 x 0.3855 92,530.39 Present Value of annual coupon 1,32,712.61 / Present Value of annuity of 1 6.1446 Annual coupon payment 21,598.37 Now, Annual coupon rate = Annual coupon payment / Face Value of Bond = 21,598.37 / 2,40,000.00 = 8.99932% Thus, Exact amount of annual coupon = 2,40,000 x 9.00% = 21,600
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