Question

Desert Company issued $15,000,000 of 8% bonds on May 1, 2020, and received cash totaling $13,308,942. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2028. The firm uses the effective interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 10%. Calculate the TOTAL dollar amount of discount that was amortized during the entire first year (5/1/20 through 4/30/21) these bonds were outstanding.

Answer 1

Answer:

Desert Company

The TOTAL dollar amount of discount that was amortized during the entire first year (5/1/20 through 4/3/21) these bonds were outstanding is:

= $65,447.

Explanation:

a) Data and Calculations:

Face value of bonds = $15,000,000

Issue value (proceeds)   13,308,942

Discount on the bonds   $1,691,058

Coupon rate = 8%

Effective interest rate = 10%

Period of bonds = 8 years

November 1, 2020:

Interest expense = $665,447 ($13,308,942 * 5%)

Cash payment =    $600,000 ($15,000,000 * 4%)

Discount amortized $65,447

Bond outstanding value = $13,374,389 ($13,308,942 + $65,447)

May 1, 2021:

Interest expense = $668,719 ($13,374,389 * 5%)

Cash payment =    $600,000 ($15,000,000 * 4%)

Discount amortized $68,719

Bond outstanding value = $13,443,108 ($13,374,389 + $68,719)