Question

On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of ___________.

Answer 1

Answer:

The answer to this question is $354.47

Explanation:

Firstly, interest payable based on face value of the bond and coupon interest rate is 6%*$100000*6/12,which is $3000 semi annually as given in the question.

However,interest based on market value and market interest rate is $95,842*7%*6/12=$3354.47

In other words, the bond discount amortization is the difference between the two interests as calculated above.

Difference=$3354.47-$3000

                 =$354.47

The necessary entries to pass  in the books of accounts are stated thus:

DR Interest expense        $3354.47

CR Interest payable                            $3000

CR Bond discount                               $354.47