Financial Accounting: An Integrated Statements Approach, 2nd Edition

456 Chapter 10 Liabilities

June 30 Interest Expense 6,359.40

Discount on Bonds Payable 359.40

Cash 6,000.00

SCF BS IS

OT AT Lc SET Ec

Thus, discount amortization results in interest expense that is greater than the periodic

coupon payment, reflecting the higher market rate of interest at which the bonds were

issued. The periodic amortization and interest expense on the bonds is the same,

$6,359.40 ($6,000 + $359.40) for each half-year.

Bonds Issued at a Premium

If the market rate is lowerthan the contract rate on the date of issuance, the bonds will

sell for more than their face amount, or at a premium. The premium represents the ad-

ditional amount that buyers are willing to pay for the bonds because of the higher con-

tract rate of interest. In the example above, assume that the Moore Co. $100,000, 12%,

five-year bonds were issued when the market rate of interest was 11%. In this case, the

lower market rate of interest causes the price of the Moore Co. bonds to be $3,769

higher than their face value, as shown in Exhibit 13.

As computed at the top of page 457, the $3,769 is the bond premium, which in-

vestors are willing to pay because the bonds pay a higher rate of interest than they

could earn on similar bonds.

1/1 6/30

Year 2007 Year 2011

12/31 12/31

$100,000

Face

Amount

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$6,000

Interest (6%)

Semiannual

Contract Rate

$58,543

$45,226

Semiannual Market Rate  5.5%

6/30

Present Value of Face Amount

Present Value of Interest Payments

$100,000 Present Value of $15.5%,n 10 (0.58543)

$6,000 Present Value of an Annuity of $1

(7.53763)

5.5%,n 10

Exhibit 13

Present Value of Bonds

Issued at Premium

$3,594, or $359.40, each six months. The entry to record the first interest payment and

the amortization of the related discount is shown below.

(continued)