On January 1, Year 1, Fox Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1 and July 1.Use the present value tables.
Refer to the Fox Co.Inc.example.What is the bonds payable account (net of any bond discount or premium) at the end of Year 2 to the nearest amount shown?

Question

Quizplus · Accepted Answer

First, calculate the semiannual coupon payment:
$100,000 x 10% x 6/12 = $5,000

Use the present value tables to calculate the present value of the bond as of January 1, Year 1:
PV of Bond = $5,000 x 8.111 = $40,555

Since the bond is issued at a discount (12% yield to maturity vs. 10% coupon rate), the discount on the bond is:
Discount = $100,000 - $40,555 = $59,445

For Year 2, there will be four semiannual coupon payments of $5,000 each. Calculate the total interest expense for Year 2 as follows:
Total Interest Expense = ($100,000 - $40,555) x (12%/2) = $2,967

Then, calculate the amortization of the bond discount for Year 2 as follows:
Amortization of Discount = Total Interest Expense - Semiannual Coupon Payment = $2,967 - $5,000 = -$2,033

Note that the negative amortization means that the bond discount is decreasing.

The bonds payable account (net of any bond discount or premium) at the end of Year 2 is calculated as follows:
Bonds Payable = PV of Bond - Cumulative Amortization of Discount
Bonds Payable = $40,555 - ($2,033 x 2) = $36,489

Rounding to the nearest dollar, the correct answer is C) $89,172.