Tano issues bonds with a par value of $95,000 on January 1, 2017. The bonds’ ann

Question

Tano issues bonds with a par value of $95,000 on January 1, 2017. The bonds’ annual contract rate is 8%, 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 10%, and the bonds are sold for $90,177.
  
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 amortization table using the straight-line method to amortize the discount for these bonds.

Explanation / Answer

Answer 1

Discount on bonds at issuance = Par value - Cash receipt on issue of bonds = $95,000 - $90,177 = $4,823

Answer 2

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

Answer 3

Note : Discount to be amortize per period = $4,823 / 6 = $804

Amortization table using the straight-line method to amortize the discount

Cash to be paid for annual interest payment : $95,000 * 8% $7,600 Multiply by Life of bonds 3 years Total Interest payment to be made over life of the bonds $22,800 Add :Discount on bonds at issuance $4,823 Total bond interest expense will be recognized over the life of the bonds $27,623

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