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?

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:

[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

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

time 3 years

rate 0.05

[tex]4600 \times \frac{1-(1+0.05)^{-3} }{0.05} = PV\\[/tex]

PV $12,526.9409

[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]

Maturity 115,000.00

time 3.00

rate 0.05

[tex]\frac{115000}{(1 + 0.05)^{3} } = PV[/tex]

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.