Question

On January 1, 2017, when the market interest rate was 14%, Luba Corporation issued bonds
in the face amount of $500,000 with interest at 12% payable semiannually. The bonds mature
on December 31, 2026.
Required:
Calculate the bond discount at issuance. How much of the discount should be amortized by the
effective interest method on July 1, 2017?
I am confused about how Discount is calculated? What table if any do I have to refer to.....
Face value is $500,000
Discount (52,970)
Selling Price of bond $447,030

Answer 1

Answer:

the bond discount = face value - market value

market value = PV of face value + PV of coupon payments

PV of face value = $500,000 / (1 + 7%)²⁰ = $129,209.50

PV of coupon payments = $30,000 x 10.594 (PV annuity factor, 7%, 20 periods) = $317,820

market value = $447,029.50

January 1, 2017, bonds are issued at a discount

Dr Cash 447,029.50

Dr Discount on bonds payable 52,970.50

    Cr Bonds payable 500,000

the discount amortization for first coupon payment = ($447,029.50 x 7%) - $30,000 = $31,292 - $30,000 = $1,292

July 1, 2017, first coupon payment

Dr Interest expense 31,292

    Cr Cash 30,000

    Cr Discount on bonds payable 1,292