CFA Practice Question

There are 520 practice questions for this study session.

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?

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.

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,
=>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
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
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
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

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!
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