
Concept explainers
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.
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
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 |
3.
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.
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Chapter 14 Solutions
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