Question

On January 1, 2020, Shay Company issues $700,000 of 10%, 15-year bonds. The bonds sell for $684,250. Six years later, on January 1, 2026, Shay retires these bonds by buying them on the open market for $731,500. All interest is accounted for and paid through December 31, 2025, the day before the purchase. The straight-line method is used to amortize any bond discount. 1. What is the amount of the discount on the bonds at issuance

Answer 1

Answer:

Discount on bonds issuance = $15750

Explanation:

A bond is issued at a discount when the issue price of the bond is less than the face value of the bond. This usually happens when the coupon rate paid by the bond is less than the market interest rate. To calculate the amount of discount on bonds issuance, we simply deduct the issue price from the face value of the bond. Thus,

Discount on Bonds = Face value - Issue price

As we know the face value of the bonds is $700000 and the issue price is $684250, we can calculate the discount on issuance to be,

Discount on bonds issuance = 700000 - 684250

Discount on bonds issuance = $15750