Tano issues bonds with a par value of $180,000 on January 1, 2013. 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 $170,862.
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. Use the straight-line method to amortize the discount for these bonds.
1. What is the amount of the discount on these bonds at issuance?
Discount = Par value – Issue price = $180,000 – $170,862 = $9,138
2. How much total bond interest expense will be recognized over the life of these bonds?
Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $7,200* $ 43,200
Par value at maturity 180,000
Amount repaid
Six payments of $7,200* $ 43,200
Par value at maturity 180,000
Total repaid 223,200
Less amount borrowed (170,862 )
Less amount borrowed (170,862 )
Total bond interest expense $ 52,338
*180,000 × 0.08 × ½ = $7,200
Semiannual Period-EndUnamortized DiscountCarrying Value01/01/2013 $9,138 $170,862
06/30/2013 $7,615 $172,385
12/31/2013 $6,092 $173,908
06/30/2014 $4,569 $175,431
12/31/2014 $3,046 $176,954
06/30/2015 $1,523 $178,477
12/31/2015 $0 $180,000
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