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A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is...

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Accounting

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% onJanuary 1, 2017. Interest is paid on June 30 and December 31. Theproceeds from the bonds are $14,703,108.

a) Using effective-interest amortization, how much interestexpense will be recognized in 2017?

b) Using effective-interest amortization, what will the carryingvalue of the bonds be on the December 31, 2017 balance sheet?

c) Using straight-line amortization, what is the carrying valueof the bonds on December 31, 2018?

d) What is interest expense for 2018, using straight-lineamortization?

Answer & Explanation Solved by verified expert
3.5 Ratings (482 Votes)

Effective Interest Amortization Schedule:

Period Cash Payment Interest Expense Discount Amortization Carrying Value
14703108
1 585000 588124.3 3124.32 14706232
2 585000 588249.3 3249.293 14709482
3 585000 588379.3 3379.265 14712861
4 585000 588514.4 3514.435 14716375
5 585000 588655 3655.012 14720030
6 585000 588801.2 3801.213 14723832
7 585000 588953.3 3953.262 14727785
8 585000 589111.4 4111.392 14731896
9 585000 589275.8 4275.848 14736172
10 585000 589446.9 4446.882 14740619
11 585000 589624.8 4624.757 14745244
12 585000 589809.7 4809.747 14750053
13 585000 590002.1 5002.137 14755056
14 585000 590202.2 5202.222 14760258
15 585000 590410.3 5410.311 14765668
16 585000 590626.7 5626.724 14771295
17 585000 590851.8 5851.793 14777147
18 585000 591085.9 6085.864 14783232
19 585000 591329.3 6329.299 14789562
20 585000 591582.5 6582.471 14796144
21 585000 591845.8 6845.77 14802990
22 585000 592119.6 7119.601 14810110
23 585000 592404.4 7404.385 14817514
24 585000 592700.6 7700.56 14825215
25 585000 593008.6 8008.582 14833223
26 585000 593328.9 8328.926 14841552
27 585000 593662.1 8662.083 14850214
28 585000 594008.6 9008.566 14859223
29 585000 594368.9 9368.909 14868592
30 585000 594743.7 9743.665 14878335
31 585000 595133.4 10133.41 14888469
32 585000 595538.7 10538.75 14899007
33 585000 595960.3 10960.3 14909968
34 585000 596398.7 11398.71 14921366
35 585000 596854.7 11854.66 14933221
36 585000 597328.8 12328.84 14945550
37 585000 597822 12822 14958372
38 585000 598334.9 13334.88 14971707
39 585000 598868.3 13868.27 14985575
40 585000 599423 14423 14999998

Requirement a:

Interest Expense recognized in 2017 = $588124+$588249 = $1176374

Requirement b:

Carrying Value Value as on December 31, 2017 = Carrying Value as at the period 2 end = $14709482

Straight line Amortization Schedule:

Period Cash Payment Interest Expense Discount Amortization Carrying Value
14703108
1 585000 592422.3 7422.3 14710530
2 585000 592422.3 7422.3 14717953
3 585000 592422.3 7422.3 14725375
4 585000 592422.3 7422.3 14732797
5 585000 592422.3 7422.3 14740220
6 585000 592422.3 7422.3 14747642
7 585000 592422.3 7422.3 14755064
8 585000 592422.3 7422.3 14762486
9 585000 592422.3 7422.3 14769909
10 585000 592422.3 7422.3 14777331
11 585000 592422.3 7422.3 14784753
12 585000 592422.3 7422.3 14792176
13 585000 592422.3 7422.3 14799598
14 585000 592422.3 7422.3 14807020
15 585000 592422.3 7422.3 14814443
16 585000 592422.3 7422.3 14821865
17 585000 592422.3 7422.3 14829287
18 585000 592422.3 7422.3 14836709
19 585000 592422.3 7422.3 14844132
20 585000 592422.3 7422.3 14851554
21 585000 592422.3 7422.3 14858976
22 585000 592422.3 7422.3 14866399
23 585000 592422.3 7422.3 14873821
24 585000 592422.3 7422.3 14881243
25 585000 592422.3 7422.3 14888666
26 585000 592422.3 7422.3 14896088
27 585000 592422.3 7422.3 14903510
28 585000 592422.3 7422.3 14910932
29 585000 592422.3 7422.3 14918355
30 585000 592422.3 7422.3 14925777
31 585000 592422.3 7422.3 14933199
32 585000 592422.3 7422.3 14940622
33 585000 592422.3 7422.3 14948044
34 585000 592422.3 7422.3 14955466
35 585000 592422.3 7422.3 14962889
36 585000 592422.3 7422.3 14970311
37 585000 592422.3 7422.3 14977733
38 585000 592422.3 7422.3 14985155
39 585000 592422.3 7422.3 14992578
40 585000 592422.3 7422.3 15000000

Requirement c:

Carrying Value as on December 31 2018

= Carrying Value as at the end of Period 4

= $14732797

Requirement d:

Interest Expense for 2018

= $592422 * 2

= $1184845
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