Question

On January​ 1, Year​ 1, assume Smart Touch Learning issued​ 10-year, $ 100000 bonds at 95​% with an interest rate of 6​% paid​ semi-annually. Using the​ straight-line amortization​ method, how much of the discount would be amortized each interest​ period?

Answer 1

Smart Touch Learning will amortize $250 of the bond discount each semi-annual interest period over the 10-year life of the bond using the straight-line amortization method.

Step-by-step explanation:

On January​ 1, Year​ 1, when Smart Touch Learning issued​ 10-year, $100,000 bonds at 95% of the face value with an interest rate of 6% paid​ semi-annually, they received 95% of the $100,000 face value, which comes out to $95,000. This implies that they issued the bonds at a discount of $5,000 ($100,000 - $95,000). Using the straight-line amortization method to spread this discount over the life of the bond (i.e., 10 years), and taking into account semi-annual interest payments, we must divide the total discount by the number of interest periods over the 10 years (20 periods).

To calculate the discount amortized each interest period: Discount Amount / Number of Periods = $5,000 / 20 = $250. Therefore, Smart Touch Learning will amortize $250 of the discount each semi-annual interest period.