Question

Hillsborough Glassware Company issues​ $1,061,000 of its​ 11%, 10-year bonds at 96 on February​ 28, 2017. The bonds pay interest on February 28 and August 31. Assume that Hillsborough uses the​ straight-line method for amortization. What net amount will be reported for the bonds on the August​ 31, 2017 balance​ sheet?

Answer 1

Bonds Payable $1,061,000

Discount $38,196

Step-by-step explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Discount on the bond = Face value - cash proceeds = $1,061,000 (100%- 96%) = $42,440

According to straight line amortization

Discount charged in the period = $42,440 / 10 = $4,244 per year = $2,122 per six months

Unamortized discount = $42,440 - $4,244 = $38,196

Coupon payment of interest = $1,061,000 x 11% = $116,710 per year = $58,355 per six months

Total Interest Expense = $58,355 + $2,122 = $60,477

The Bond will be reported at its face value.