Oak Branch Inc. issued \$700,000 of 5%, 10-year bonds when the market rate was 4%. They received \$757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds.

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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 6EA
Textbook Problem
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Oak Branch Inc. issued \$700,000 of 5%, 10-year bonds when the market rate was 4%. They received \$757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds.

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 = 700000× 5%/2= \$17500 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...

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