Question

Santa Corporation issued a bond on January 1 of this year with a face value of $1,000. The bond's coupon rate is 6 percent and interest is paid once a year on December 31. The bond matures in three years. The annual market rate of interest was 8 percent at the time the bond was sold.
The following amortization schedule pertains to the bond issued:

Cash
Paid Interest
Expense Amortization Balance
January 1, Year 1 $948
December 31, Year 1 $60 $76 $16 964
December 31, Year 2 60 77 17 981
December 31, Year 3 60 79 19 1,000


Required:

1. What was the bond's issue price?

2. Did the bond sell at a discount or a premium? How much was the premium or discount?

3. What amount(s) should be shown on the balance sheet for bonds payable at the end of Year 1 and Year 2?

4. Show how the following amounts were computed for Year 2: (a) $60, (b) $77, (c) $17, and (d) $981. (Enter percentages in decimals.)

Answer 1

Answer:

1. Total of amortisation for 3 years = 16+17+19 = 52

Bonds issue price = 1000 - 52 = $948

2.

Bond is sold at discount.

Amount of discount = Amount of amortisation over 3 years

= $52

3.

Amount to be shown in balancesheet will be inclusive of the amortisation charge for the year

Bonds payable at the end of Year 1 = 948 + 16 = 964

Bonds payable at the end of Year 2 = 964 + 17 = 981

4.

a,

$60 is the amount of interest paid per annum. This is calulated on the facevalue of bond

$1,000x x6% = %60

b,

$77 is the interest expense for Year 2.

This is sum of Interest paid and Amortisation charge for the year

= 60 + 17 =77

c,

$17 is the amortization expence for Year 2

Opening balance of Bonds payable for Year 2 = $964

Market rate of interest = 8%

Interest charge for Year 2 = $77

Cash paid as interest = $60

Hence amortisaton charge for Year 2 = Interest expense - Interest paid = $77 - $60 = $17

d,

$981 is the balnce of balance of bonds payble after Year 2

Balance for Year 2 = Opening balance payable + Amortisation expence for the Year (arived from Step 4c above) = $964 + $17

= $981