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30 March, 11:06

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2019. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2021?

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  1. 30 March, 11:39
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    The carrying value of the bonds on December 31, 2021 is $24,579,403

    Explanation:

    In this question, we are asked to calculate the value of the bonds on December 31st 2021 using the straight line amortization

    Firstly, we identify the following;

    Par value of Bonds = $25,000,000

    Less: Proceeds from bonds = $24,505,180

    Discount on Bonds = Per Value Bonds - Proceeds from bonds = $494,820

    Straight Line amortization till December 31,2021 = 494820/40*6 = 74223

    Carrying value of the bonds on December 31, 2021 = 24505180+74223 = 24579403
  2. 30 March, 12:44
    0
    The carrying value of the bonds on December 31, 2021 is $23,025,259

    Explanation:

    A method of amortization in which equal amount of interest is allocated throughout the life of bond. It is measured by dividing total interest by total debt life. This interest is charged as an expense each year.

    Coupon Payment = $25,000,000 x 7.8% = $1,950,000 per year

    Coupon Payment = $1,950,000 per year / 2 = $975,000 semiannually

    Discount = $25,000,000 - 24,505,180 = $494,820

    This discount will be charged over the bond whole life

    Discount = $494, 820 / 20 = $24,741 / 2 = $12,370.5 semiannually

    Total Interest Expense = $975,000 + $12,370.5 = $987,370.5 semiannually

    Carrying Amount = Face value - (Interest expense x 2) = $25,000,000 - ($987,370.5 x 2) = $23,025,259
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