Question

Preparing a Bond Amortization Schedule for a Bond Issued at a Discount and Determining Reported Amounts LO10-4 On January 1 of this year, Ikuta Company issued a bond with a face value of $115,000 and a coupon rate of 4 percent.
The bond matures in 3 years and pays interest every December 31.
When the bond was issued, the annual market rate of interest was 5 percent.
Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

(Use the appropriate factor(s) from the tables provided. Round your answers to whole dollars.)

Required:

1. Complete a bond amortization schedule for all three years of the bond's life. Date Cash Interest Interest Expense Amortization Book Value of Bond Jan. 01, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3

2. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2?

Answer 1

Answer:

attached answer

Explanation:

To build the amortization schedule we first needto know the issuance of the bond. Which will be determinate as the presetn value of the coupon payment and the maturity:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Coupon: 115,000 x 4% = 4,600.00

time  3 years

rate 0.05

$4600 \times \frac{1-(1+0.05)^{-3} }{0.05} = PV$

PV $12,526.9409

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   115,000.00

time   3.00

rate  0.05

$\frac{115000}{(1 + 0.05)^{3} } = PV$  

PV   99,341.32

PV c $12,526.9409

PV m  $99,341.3238

Total $111,868.2648

Now, as the proceeds are lower than face value there is a discount for:

115,000- 111,868.27 = 3,132

Then we calculate the interest expense by multipling the carrying value by market rate:

111,868.27 x 5% = 5593.41

and the difference between the coupon payent is the amortization o nthe discount:

5,593.41 - 4,600 = 993.41

This is repeated for the next years until maturity.