- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments

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**CFA Practice Question**

Orchard Company issued $2,000,000 of 8% debenture bonds on 7/1/2015 for $1,752,000. This resulted in an effective yield (market rate) of 10%. The bonds pay interest semi-annually on 1/1 and 7/1 and mature in ten years on 7/1/2025. If Orchard uses the effective interest method of amortization, how much of the bond discount should be amortized during the second semi-annual period ending 7/1/2016?

B. $7,600

C. $7,980

A. $12,400

B. $7,600

C. $7,980

Correct Answer: C

Interest expense for the period is equal to the carrying value of the bonds x effective interest rate. Interest paid is $80,000, which equals the face value x stated interest rate (2 million x .04 semi-annually) and remains the same over the life of the bonds. The discount amortization from the first interest period, $7,600 (87,600 - 80,000), is added to the $1,752,000 to obtain the carrying value of $1,759,600 for the start of the second semi-annual period. 87,600= 1,752,000 x .05. Thus, the discount amortization during the second semi-annual period is $87,980 (1,759,600 x .05) - $80,000 or $7,980.

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**User Contributed Comments**
15

User |
Comment |
---|---|

katybo |
Didn't get it. Why ad to the $1.752.000? |

cbb1 |
Katybo, add the amortization of the discount recorded in the first period (the $7,600), which resuls in a new higher carrying value of the discounted notes. Thus,the amount declines over time. Thus, the amount of the discount declines over time and the amount of the interest increases over time. |

haarlemmer |
In exam, choose any number above and close to 7600. |

Shelton |
Coupon Fr=80k=I_1-P_1=I_2-P_2, C=F=2m, B_0=P=1752k, r=4%,i=5%, n=20 =>I_1=iB_0=87.6k, thus P_1=7.6k, =>B_1=B_0+P_1=1759.6k, =>I_2=iB_1=87.98k, thus P_2=7.98k |

AlexYuen |
87,600 = 0.05 x 1,752,000 |

Rotigga |
Discount on Bonds Payable Balance = $248,000 7/1/00 Bond Interest Expense = $1,752,000 * 0.1 * 0.5 = $87,600 Discount on Bonds Payable = $87,600 â?? ($2,000,000) * 0.08 * 0.5 = $7,600 Discount on Bonds Payable Balance = $248,000 - $7,600 = $240,400 1/1/01 New Bonds Payable Balance = $2,000,000 - $240,400 = $1,759,600 Bond Interest Expense = $1,759,600 * 0.1 * 0.5 = $87,980 Discount on Bonds Payable = $87,980 â?? $80,000 = $7,980 |

jerylewis |
disagree with cbb1 |

rfvo |
USE THE AMORT ON YOUR CALCULATOR...THAT'S WHAT ITS MEANT FOR...SO SIMPLE |

sha09 |
how can i use the amort. on my caculator? |

2014 |
Enter values n = 20 fv = -2,000,000 pv = 1,752,000 i/y = 5 payment = -80,000 To Enter into amortisaton schedule press 2nd press pv in p1 enter 2 in p2 enter 2 down arrow u get answers PRN is = amortisation INT = Interest i hope this helps thanks |

gill15 |
Just make a chart for all questions....its easy then Carrying Value IntX Interest payments CV(End) it's how i always taught my actuarial students....after a while you just understand everything... |

lijeremiah |
calculator for amort bond |

ashish100 |
that took me so damn long to figure it out. |

fredpat01 |
Carrying value of a discount for bond will increase gradually over the life of the bond, which will increase the periodic amortization gradually too. |

parkjihoon |
Thanks for the calculator tips! Doing the table takes time so it shouldn't be done on the exam. This was very helpful! |