Ask Me Help Desk - Accounting - Straight Line Ammortization

Problem: A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2008?

What I have so far...

20000000 x .078 = 156000 (cash paid)

20000000 - 19604145 = 395855/20yrs = 19792.75 (interest Expense)

Which leads to a continuous Discount Amortized amount of 1540207.25... and after two years that amount would total to 3080414.5 added to the carrying value of 19604145 is 22684559.5. However the answer to this problem is... 19,663,523.

I just don't understand how to get this number.

Any help would be lovely,

Thanks

I don't understand where you got the 1,540,207.25. (Could you please use commas on the large numbers. They are very difficult to read.) If I knew where you were getting that from, I could tell you where you are confused.

You also cannot have a carrying value that goes the opposite direction from the original. You have a discount, i.e. with a carrying value less than the face value. This has to remain less. It can't now go higher. So that is a clue that something is wrong.

You have the annual amortization figure. You just need two years of it.

Quote:

Originally Posted by wongkey

Problem: A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2008?

What I have so far...

20000000 x .078 = 156000 (cash paid)

20000000 - 19604145 = 395855/20yrs = 19792.75 (interest Expense)

Which leads to a continuous Discount Amortized amount of 1540207.25...and after two years that amount would total to 3080414.5 added to the carrying value of 19604145 is 22684559.5. However the answer to this problem is...19,663,523.

I just don't understand how to get this number.

Any help would be lovely,

Thanks

Oops cash paid is should be 1,560,000 and then you take 1,560,000 - 19792.75 = 1,540,207.25. But once you do this procedure after two years it should be 3080414.5. Isn't the carrying value just the stated amount above, 19,604,145?

Cash Paid Int. Exp. Amortization CV
19,604,145
1,560,000 19,792.75 1,540,207.25 21,144352.25

... Is this schedule on the right track, or is it off?

Oh, I see what you're confused on. You're trying to get the interest expense. But that's not the amortization. The amortization is just the 19,792.75. And actually for a discount, that's incorrect anyway. (When you pay the interest that's a debit to the expense. When you amortize a discount, that's also a debit to the interest. So it's an add, not a subtract. You subtract when it's a premium.)

But that isn't carrying value. The initial carrying value is the amount the bonds were issued for, that 19 million whatever it was. The difference is the discount. You are taking 1/20th of that discount each year and adding it to the carrying value. It's working its way back towards the 20 million. So you're only using that discount amount. The interest paid has nothing to do with it. So you just need two years of that.

Quote:

Originally Posted by wongkey

Problem: A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2008?

What I have so far...

20000000 x .078 = 156000 (cash paid)

20000000 - 19604145 = 395855/20yrs = 19792.75 (interest Expense)

Which leads to a continuous Discount Amortized amount of 1540207.25...and after two years that amount would total to 3080414.5 added to the carrying value of 19604145 is 22684559.5. However the answer to this problem is...19,663,523.

I just don't understand how to get this number.

Any help would be lovely,

Thanks

So my amortization amount is correct? So should my cash paid should be 0? I always thought that cash paid was the face value times the stated %?

So this is how it's supposed to look like??

Cash Paid Interest Exp. Amort. CV "(19,604,145)
0 19,792.75 19,792.75 19,623,937.75
0 19,792.75 19,792.75 19,643,730.5

and so on... even if I were to continue I still wouldn't be able to get the correct answer of... 19,663,523... What am I still doing wrong?

Quote:

Originally Posted by wongkey

Problem: A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2008?

What I have so far...

20000000 x .078 = 156000 (cash paid)

20000000 - 19604145 = 395855/20yrs = 19792.75 (interest Expense)

Which leads to a continuous Discount Amortized amount of 1540207.25...and after two years that amount would total to 3080414.5 added to the carrying value of 19604145 is 22684559.5. However the answer to this problem is...19,663,523.

I just don't understand how to get this number.

Any help would be lovely,

Thanks

Oh I get it now... the amortization should be the 19,792.75 and then I add the cash paid amount. Then I take the 19,792.75 and add it to the 1,560,000 which should be 780.000 which gives me 799,792.75. Right? Then I take the 19.792.75 and add that to the Carrying value of 19,604,145 until I get my number... makes sense...

THANKS!

Quote:

Originally Posted by wongkey

Oh I get it now...the amortization should be the 19,792.75 and then I add the cash paid amount. Then I take the 19,792.75 and add it to the 1,560,000 which should be 780.000 which gives me 799,792.75. Right? Then I take the 19.792.75 and add that to the Carrying value of 19,604,145 until I get my number....makes sense...

THANKS!

No, still not right. You're making this way more complicated than it is, partly because you keep insisting on dealing with the interest payment itself. Amortization has nothing to do with the interest payment, as I've already stated. And I have no idea where 780,000 came from.

A carrying value for a bond that was issued with a discount is the bond face value minus the discount. Period. The interest that is paid is an expense. The carrying value is on your balance sheet. Expenses don't go on the balance sheet, so it can't affect it.

You are JUST taking the discount and dividing it among 20 years, which you've done correctly as 19,792.75 per year.

When the bonds were issue, the carrying value is 19,604,145, the amount they were issued for. You have a discount account with a balance of 395,855. You are going to remove that account one year at a time. Bond face value 20,000,000 less discount of 395,855 = bond carrying value of 19,604,145. As you amortize, you're going to reduce the discount. As that reduces, the carrying value goes up. You only have 395,855 to work with and you've already divided it by 20. If you do this for 20 years, you'll have done the entire 395,855. If you keep adding it onto the interest paid, it's going to be bigger than the 395,855 when you get done. You're JUST removing the 395,855 one year a time.

You have to learn the difference between amortization, interest payment, and interest expense. The payment is the actual payment. The expense is the combination of the payment and the amortization. But the amortization itself is just itself. The discount is only affected by amortization because that is the balance sheet side of things.