Bond Discount Amortization Calculation and Sale of Bonds
How do we calculate the bond discount amortization?
1. Calculate the carrying amount of the bonds at each date based on the given data.
2. Subtract the carrying amount from the face value of the bonds to determine the discount amortization.
What was the total cash received from the sale of the bonds and how do we calculate the gain or loss?
1. Determine the accrued interest and total cash received from the sale.
2. Compare the cash received to the carrying amount of the bonds on the date of sale to calculate the gain or loss.
To calculate the bond discount amortization, we need to first calculate the bond's carrying amount at each date:
- 1/1/2012: Carrying amount = $100,000
- 7/1/2012: Carrying amount = $101,200
- 1/1/2013: Carrying amount = $102,472
- 7/1/2013: Carrying amount = $103,820
- 1/1/2014: Carrying amount = $105,250
- 7/1/2014: Carrying amount = $106,765
- 1/1/2015: Carrying amount = $108,371
To calculate the bond discount amortization, we subtract the carrying amount from the bond's face value ($120,000) at each date.
- 1/7/2012: Discount amortization = $18,800
- 1/1/2013: Discount amortization = $17,528
- 7/1/2013: Discount amortization = $16,180
- 1/1/2014: Discount amortization = $14,750
- 7/1/2014: Discount amortization = $13,235
- 1/1/2015: Discount amortization = $11,629
At the time of sale in October 2014, CR7 had a gain of $2,433 on the sale of the bonds.
Reflecting on the bond discount amortization calculation and the sale of bonds, it's important to understand the process involved in managing bond investments. Bond discount amortization refers to the gradual recognition of the bond discount as interest revenue over the bond's life.
By calculating the carrying amount of the bonds at each date and subtracting it from the face value, we can determine the discount amortization. This helps in accurately reflecting the bond's value and accounting for the discount received at the time of purchase.
When it comes to selling the bonds, it's crucial to consider the accrued interest and total cash received. By comparing the cash received to the carrying amount on the date of sale, we can calculate the gain or loss on the sale.
In the case of CR7 Company's sale of the bonds in October 2014, they had a gain of $2,433. This gain represents the difference between the cash received and the carrying amount of the bonds at the time of sale.
Overall, the bond discount amortization calculation and sale of bonds require careful attention to detail and an understanding of financial principles. By following the appropriate procedures, companies can accurately account for their bond investments and make informed decisions regarding their portfolio.