Question

On June 1, 2019, Splish Company sold $3,720,000 in long-term bonds for $3,262,800. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.

Required:
Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31.

Answer 1

For second period

Cash interest = $3,720,000 * 8% = $297,600

Interest expenses = 3,262,800 * 10% = $326,280

Discount = $326,280 - $297,600 = $28,680

For third period

Cash interest = $3,720,000 * 8% = $297,600

Interest expenses = $3,291,480 * 10% = $329,148

Discount = $329,148 - $297,600 = $31,548

Effective interest amortization table

Annual period Cash int. Interest exp Discount Carrying amount

6/1/19 $3,262,800

5/31/20 $297,600 $326,280 $28,680 $3,291,480

5/31/21 $297,600 $329,148 $31,548 $3,323,028

5/31/22 $297,600 $332,303 $34,703 $3,357,731

5/31/23 $297,600 $335,773 $38,173 $3,395,904