Stanford issues bonds dated January 1, 2015, with a par value of $253,000. The b
ID: 2491103 • Letter: S
Question
Stanford issues bonds dated January 1, 2015, with a par value of $253,000. The bonds’ annual contract rate is 6%, and 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 8%, and the bonds are sold for $239,733.
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?
Total Bond Interest expense
Amount repaid:
_________payments of__________
Par value at maturity______________
Total repaid 0
Less amount borrowed____________
Total bond interest expense__________
3)Prepare an Amortization table using the effective interest method to amortize the discount for these bonds.
2)How much total bond interest expense will be recognized over the life of these bonds?
Total Bond Interest expense
Amount repaid:
Explanation / Answer
Answer 1) The amount of the discount on the bond at Issuance can be calculated by the following formula = Face value of the bond - Amount received on issuance
Therefore , discount on issuance = 253000 - 239733 = 13267
Answer 2) The total Bond Interest expenses over the life of the Bond is $ 58807. Bond Expenses = Interest paid on the facevalue of the bond + amortisation amount of the discount on Issuance.
The calculation of total Bond Interest Expenses are :-
Amount paid as Interest on Face value over the Life of the Bond = $ 45540
Add :- Amortisation of Dicount on issuance $13267
Total Interest Expenses $ 58807
Answer 3)
Amortization Table using the effective interest method to amortize the discount for these bonds.
Date
Interest payable (a)
Interest Expenses (b)
Amortization amount ©
Debit in discount column (d)
Credit balance bond payable (e)
Book value of the bond (f)
1-Jan-15
13267
253000
239733
30-Jun-15
7590
9589
1999
11268
253000
241732
31-Dec-15
7590
9669
2079
9188
253000
243812
30-Jun-16
7590
9752
2162
7026
253000
245974
31-Dec-16
7590
9839
2249
4777
253000
248223
30-Jun-16
7590
9929
2339
2438
253000
250562
31-Dec-16
7590
10028
2438
0
253000
253000
Total
45540
58807
13267
Interest Payable is calculated - Face value * (6/2) %
Interest Expenses figure in column (f) * (8/2)%
Amortization Amount = Difference between col (b) - col (a)
Debit in discount col = Previous fig of col (d) - Amortize amount in col ©
Book value of bond = Previous fig of col (f) + Amortize amount in col ©
Amortization Table using the effective interest method to amortize the discount for these bonds.
Date
Interest payable (a)
Interest Expenses (b)
Amortization amount ©
Debit in discount column (d)
Credit balance bond payable (e)
Book value of the bond (f)
1-Jan-15
13267
253000
239733
30-Jun-15
7590
9589
1999
11268
253000
241732
31-Dec-15
7590
9669
2079
9188
253000
243812
30-Jun-16
7590
9752
2162
7026
253000
245974
31-Dec-16
7590
9839
2249
4777
253000
248223
30-Jun-16
7590
9929
2339
2438
253000
250562
31-Dec-16
7590
10028
2438
0
253000
253000
Total
45540
58807
13267
Interest Payable is calculated - Face value * (6/2) %
Interest Expenses figure in column (f) * (8/2)%
Amortization Amount = Difference between col (b) - col (a)
Debit in discount col = Previous fig of col (d) - Amortize amount in col ©
Book value of bond = Previous fig of col (f) + Amortize amount in col ©
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