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?

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

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