Question

Preparing a Bond Amortization Schedule for a Bond Issued at a Discount and Determining Reported Amounts LO10-4 On January 1 of this year, Ikuta Company issued a bond with a face value of $115,000 and a coupon rate of 4 percent.

The bond matures in 3 years and pays interest every December 31.
When the bond was issued, the annual market rate of interest was 5 percent.
Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

(Use the appropriate factor(s) from the tables provided. Round your answers to whole dollars.)

Required:

1. Complete a bond amortization schedule for all three years of the bond's life. Date Cash Interest Interest Expense Amortization Book Value of Bond Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3

2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2?

Answer 1

attached answer

Step-by-step explanation:

To build the amortization schedule we first needto know the issuance of the bond. Which will be determinate as the presetn value of the coupon payment and the maturity:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon: 115,000 x 4% = 4,600.00

time 3 years

rate 0.05

`4600 * (1-(1+0.05)^(-3) )/(0.05) = PV\\`

PV $12,526.9409

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 115,000.00

time 3.00

rate 0.05

`(115000)/((1 + 0.05)^(3) ) = PV`

PV 99,341.32

PV c $12,526.9409

PV m $99,341.3238

Total $111,868.2648

Now, as the proceeds are lower than face value there is a discount for:

115,000- 111,868.27 = 3,132

Then we calculate the interest expense by multipling the carrying value by market rate:

111,868.27 x 5% = 5593.41

and the difference between the coupon payent is the amortization o nthe discount:

5,593.41 - 4,600 = 993.41

This is repeated for the next years until maturity.