To find the carrying value of the bonds after the first interest payments, we need to do the calculations to find the interest ..
Calculation of Interest:-
Cash interest payment of $ 6,900 ( 1.5% x $ 460,000) at the end of each semiannual period during the bonds life of 10 years… ( 3% / 2 = 1.5%)
That is $ 6,900 is paid for every six months say from Jan 30th to June 30 and June 30 to Dec 31……
So, every year we will pay $ 13,800 ( $ 6,900 + $ 6,900 ) for 20 periods ( two payments are made for every year, so for 10 years , we need to make the interest payment for 20 periods…)
Now lets amortize a bond discount.. (Amortizing is nothing but paying back
Straight Line Method…
This method allocates an equal portion of the total bond interest expense to each interest period .
We divide the total bond interest expense of $ 142,000 by 20
This gives the interest expense of $ 7,100 per period. ( $ 6,900 interest + $ 200 Discount)
Interest Computation
Amount repaid to bondholders
20 interest payments of $ 6,900 = $ 138,000
Par value at maturity =$ 460,000
_________
Total repaid to bondholders = $ 598,000
Less:- Amount borrowed from bondholders = $ 456,000
__________
Total bond interest expenses = $ 142,000
__________
The following table shows the decrease in Discount on bonds payable account and the increase in the bonds carrying value ( Straight line method)
This is the summarization of Discount bond Straight Line amortization..
Semiannual period –end Unammortized Discount Carrying Value
(0) 1 / 30 $ 4,000 $ 456,00
(1) 6 / 30 $ 3,800 $ 456,200
(4,000 -200) ( 456,00+200)
The carrying value of the bonds after the first interest payment is $ 456,200
