ac221_fall2012_solution to inclass exercise on bond retirement

The difference between interest expense and coupon

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Unformatted text preview: us to estimate the book value of the bond on 1/1/2013. Start by estimating the interest expense for 2012. Interest Expense for 2012 = Beginning Book value * Interest Rate = $87,564 * 10% = $8,756.4 We know that the coupon payment during 2012 was $5,000. The difference between Interest Expense and Coupon (cash) payment is $3,756.4 So, $3,756.4 was the amount amortized from the discount during 2012. On 1/1/2013, the book value of the bond is: $87,564 + $3,756.4 = $91,320.4 Alternatively, the unamortized discount on 1/1/2013 will be: $12,434 (initial discount on 1/1/2012) - $3,756.4 = $8,677.6 Implying a book value on 1/1/2013: $100,000 - $8,677.6 = $91,322.4 (Both approaches above are correct in estimating the book value of the bond. The differen...
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