Question

On December 31, Caper, Inc., issued $250,000 of eight percent, ten-year bonds for $218,844, yielding an effective interest rate of ten percent. Semiannual interest is payable on June 30 and December 31 each year. The firm uses the effective interest method to amortize the discount.

Required
Prepare an amortization schedule showing the necessary information for the first two interest periods.

Answer 1

Capter, Inc.

Amortization Schedule

Date Payment Interest Expense Amortization Net Book Value

Dec. 31 $218,844

June 30 $10,000 $10,942 $942 219,786

Dec. 31 10,000 10,989 989 220,775

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds = $250,000

Bonds proceeds = 218,844

Bonds discounts = $31,156

Coupon rate = 8% with semiannual payments

Effective interest rate = 10%

On June 30:

Interest payment = $10,000 ($250,000 * 4%)

Interest Expense = $10,942 ($218,844 * 5%)

Amortization of discount = $942

Value of bonds = $219,786 ($218,844 + 942)

On December 31:

Interest payment = $10,000 ($250,000 * 4%)

Interest Expense = $10,989 ($219,786 * 5%)

Amortization of discount = $989

Value of bonds = $220,775 ($219,786 + 989)