On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 a
ID: 2401498 • Letter: O
Question
On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.
On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.
On January 1, 2016, a company issues 3-year bonds with a face value of $60,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $63,268 for the bonds.
Required: Fill in the table assuming the company uses effective-interest bond amortization. (Round your answers to the nearest whole dollar.)Explanation / Answer
Bonds Amortization table: Date Coupon interest paid in cash@7% Interest Expense@5% Premium amortization Unamortized premium Carrying Value Face Value Jauary 1, 2016 $ 3,268 $ 63,268 $ 60,000 Decemebr 31, 2016 $ 4,200 $ 3,163 $ 1,037 $ 2,231 $ 62,231 $ 60,000 Decemebr 31, 2017 $ 4,200 $ 3,112 $ 1,088 $ 1,143 $ 61,143 $ 60,000 Decemebr 31, 2018 $ 4,200 $ 3,057 $ 1,143 $ 0 $ 60,000 $ 60,000 Working: Coupn Interest paid in cash = Face Value x Stated Interest Rate = $ 60,000 x 7% = $ 4,200 Coupon interest is paid on face value.So it is same for all years. Interest Expense = Beginning of year Book Value x market interest rate Year Beginning Book Value x Market Interest rate = Interest Expense 1 $ 63,268 x 5% = $ 3,163 2 $ 62,231 x 5% = $ 3,112 3 $ 61,143 x 5% = $ 3,057
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