Chapter 14, Problem 2E

To determine

Issue of bond at discount:

When the coupon rate or contract rate of a bond is lower than the market interest rate, the bond is being issued at discount. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.

Straight Line Method Amortization of discount:

Under straight line amortization method, a specific amount of discount is amortized each period till its maturity period. The period ending amortization amount is computed by dividing the total discount by the number of periods in maturity of the bonds payable.

To determine:

1. Compute the amount of the discount on these bonds at issuance

2. Compute the total bond interest recognized over the life of these bonds

3. Preparation of amortization table using the straight line method to amortize the discount.

Answer to Problem 2E

Solution:

1. The amount of $9,138 is discounted on issue of the bonds.

2. The total bond interest expense recognized over the life of these bonds is $52,338.

3.

Period Ending	Unamortized Discount	Carrying Value
01/1/2017	$9,138	$170,862
06/30/2017	$7,615	$172,385
12/31/2017	$6,092	$173,908
06/30/2018	$4,569	$175,431
12/31/2018	$3,046	$176,954
06/30/2019	$1,523	$178,477
12/31/2019	0	$180,000
Total

Explanation of Solution

Explanation:

1. Computation of Discount on bonds issuance

$\begin{array}{l}DiscountonBondsPayable=BandsParValue–BondsIssuePrice\hfill \\ =\$180,000-\$170,862\hfill \\ =\$9,138\hfill \end{array}$

2

Computation of total interest expense
Amount to be repaid at maturity:
Total Interest Payment	$43,200
Par Value of Bonds	$180,000
Total amount to be repaid	$223,200
Less : Selling Price of the Bonds	$170,862
Total Bond Interest Expense	$52,338

$\begin{array}{l}*InterestPayment=\$7,200X6=\$43,200\hfill \\ *SemiannualInterestPayment=\$180,000X0.04=\$7,200\hfill \end{array}$

3.

$\begin{array}{l}SemiannualDiscountAmortized=\frac{DiscountonBondsPayable}{NumberofPeriods}\hfill \\ =\frac{\$9,138}{6periods}\hfill \\ =\$1,523\hfill \end{array}$

Conclusion

Conclusion:

Tano issued the bonds at $170,862 with a discount of $9,138 which is amortized over the life of bonds at $1,523 per period. The total interest expense to be recognized over the issued bonds is $52,338.