Stanford issues bonds dated Janurary 1, 2015, with a par value of $500,000. The

Question

Stanford issues bonds dated Janurary 1, 2015, with a par value of $500,000. The bonds' annual contract rate is 9%, and the 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 $463,140.

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 amorization table like the one in Exhibit 10B (Financial and Managerial Accounting, Wild, 6th edition) for these bonds; use the effective interest method to amortize the discount.

Explanation / Answer

1. What is the amount of the discount on these bonds at issuance?

Amount of the discount on these bonds at issuance = 500000-463140

Amount of the discount on these bonds at issuance = 36860

2. How much total bond interest expense will be recognized over the life of these bonds?

Total bond interest expense will be recognized over the life of these bonds = Total Interest payment + Amount of the discount on these bonds at issuance

Total bond interest expense will be recognized over the life of these bonds = (500000*9%*1/2 * (3*2)) + 36860

Total bond interest expense will be recognized over the life of these bonds = 171860

3. Prepare an amorization table like the one in Exhibit 10B

Period Interest Payment Interest Expenses Discount Amortisation Unamortised Discount Carrying Value Bond Value Janurary 1, 2015 36860 463140 500000 June 30 2015 22500                 27,788.00                              5,288.00                            31,572.00         468,428.00 500000 December 31 2015 22500                 28,106.00                              5,606.00                            25,966.00         474,034.00 500000 June 30 2016 22500                 28,442.00                              5,942.00                            20,024.00         479,976.00 500000 December 31 2016 22500                 28,799.00                              6,299.00                            13,725.00         486,275.00 500000 June 30 2017 22500                 29,177.00                              6,677.00                              7,048.00         492,952.00 500000 December 31 2017 22500                 29,548.00                              7,048.00                                           -           500,000.00 500000

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