Question

Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1, 855, 816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

Answer 1

Answer:

# Beg. Value cash outlay  Int expense Amortization End Value

1    1,855,816 200,000     228,836.8 28,836.8      1,884,653

2   1,884,653 200,000     228,836.8 28,836.8       1,913,490

3    1,913,490 200,000     228,836.8 28,836.8      1,942,326

4   1,942,326 200,000     228,836.8 28,836.8        1,971,163

5     1,971,163 200,000     228,836.8 28,836.8     2,000,000

Explanation:

We subtract the cash proceeds form the face value to knwo the discount/premium

2,000,000 - 1,855,816 = 144,184

as this is striaght-line method it will be split equally between each interest payment

144,184 / 5 = 28,836.8

This will increase the carrying value getting closer to the face valeu as we reach maturity date

the cash outlay per year will be 2,000,000 x 10% = 200,000

The interest expense is the sum of the cash oputlay (paid to bondholder each year) and the amortization on the bonds discount