Question

Tano Company issues bonds with a par value of $99,000 on January 1, 2021, The bonds' annual contract rate is 6%, 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 8%, and the bonds are sold for $93,809. 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?

Answer 1

The discount on these bonds at issuance is $5,191. The total bond interest expense over the life of these bonds is $8,910.

Step-by-step explanation:

The discount on the Tano Company bonds at issuance can be calculated by finding the difference between the par value of the bonds and the amount they were sold for. In this case, the par value is $99,000 and the bonds were sold for $93,809. Therefore, the discount on these bonds is $5,191.

The total bond interest expense over the life of these bonds can be calculated by multiplying the par value of the bonds by the annual contract rate and the number of years until maturity, and then dividing by 2 (since interest is paid semiannually). In this case, the calculation would be: ($99,000 * 0.06 * 3) / 2 = $8,910.

Answer 2

The discount on the bonds is $5,191, which is the difference between the par value and the price they were sold for. The total bond interest expense recognized over the life of the bonds would be $11,131, calculated by adding the total interest payments to the bond discount.

The student has asked two questions about bond accounting. First, they want to know the amount of the discount on the bonds at issuance.

The discount on the bonds is the difference between the par value and the selling price. In this case, it's $99,000 (par value) - $93,809 (selling price) = $5,191. Secondly, they have asked about the total bond interest expense over the life of the bonds.

To calculate the total bond interest expense, we would typically add the actual interest payments over the life of the bond to the bond discount and subtract any bond premium.

Here, the interest payments would total ($99,000 * 6% * 3 years = $5,940) and since this bond was sold at a discount (no premium), the total interest expense over the life of the bond would be the sum of the total interest payments and the bond discount, which equals $5,940 (interest payments) + $5,191 (bond discount) = $11,131.