Diana Inc. issued \$100,000 of its 9%, 5-year bonds for \$96,149 when the market rate was 10%. The bonds pay interest semi-annually. Prepare an amortization table for the first three payments.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 13, Problem 5EA
Textbook Problem
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Diana Inc. issued \$100,000 of its 9%, 5-year bonds for \$96,149 when the market rate was 10%. The bonds pay interest semi-annually. Prepare an amortization table for the first three payments.

To determine

Concept introduction:

Bonds:

are defined as debt instruments which are usually issued by the company that borrows to its lenders. They are issued at a rate of interest that is specified and for a specified period of time. The bondholders receive a fixed rate of interest on the bonds and the repayment of the bonds is made at the maturity date.

Amortization of Bonds discount or premium:

The Bonds can be issued at a discount or premium. The discount or premium on issue of bonds or the life of bonds is amortized using the effective rate methods or the straight line method.

To prepare:

The amortization table.

Explanation of Solution

The amortization table is prepared as follows:

• The Cash interest payment is calculated as Par value × Interest rate × period = 100000× 9%/2 = \$4500 for each semiannual period
• The interest expense for each period is calculated as 5% of the beginning carrying balance of the bond for that period.
• The Discount Amortized is the difference between the Cash Interest paid and the Bond interest expense for a period.
• The ending carrying value balance for each period is calculated by subtracting the par value and unamortized discount for that period.
•  Amortization Table Using the effective interest rate method Semiannual Interest Period...

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