Question

Stanford issues bonds dated January 1, 2021, with a par value of $251,000. The bonds' annual contract rate is 10%, 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 12%, and the bonds are sold for $238,667. What is the amount of the discount on these bonds at issuance? How much total bond interest expense will be recognized over the life of these bonds? Prepare an effective interest amortization table for these bonds.

Answer 1

The bond discount at issuance is $12,333. The total bond interest expense over the life of the bonds, including the amortization of the bond discount, is approximately $87,646.45.

Calculate the bond discount at issuance:

Discount = Face value - Selling price

Bond discount = Face value - Selling price

= $251,000 - $238,667

= $12,333

The initial carrying amount of the bonds is their selling price, and the carrying amount adjusts each period for the amortization of the discount.

The semiannual cash interest payment, based on the contract rate, is:

Semiannual cash interest payment = $251,000 × 10% / 2

= $12,550

By the end of the 6th period, the carrying amount of the bonds adjusts to their face value of $251,000.