Week 13 — What the Bonds Really Cost: Discounts, Premiums, and Carrying Value

Assignment 12 of the term — compute the bicycle shop's bond interest, record its bonds issued at a discount and at a premium, follow the carrying value, and set a founder straight about what the bonds really cost.

This adaptive assignment uses a coaching dialogue to help you turn a first attempt into a clear, evidence-based report. You remain the author. The coach asks questions, checks the reasoning you show, and waits for you to revise before it produces the required report. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles; this assignment is where you put them together. It builds on Week 5, where you split the balance sheet into current and long-term sections, on Week 11, where you spread a van's cost with the straight-line method, and on Week 12, where you recorded notes payable.

The task

This week's material is pinned. A bond's face value is repaid at maturity, its stated rate sets the cash interest paid, and the market rate is the return investors require. Bonds sell at face when the market rate equals the stated rate, at a discount when the market rate is higher, and at a premium when it is lower; the price is the present value of the bond's cash flows at the market rate. A discount is amortized over the bond's life as additional interest expense and a premium as a reduction of interest expense; the effective-interest method is the method GAAP calls for, and the straight-line method is acceptable when its results are not materially different. The carrying value is Bonds Payable minus any unamortized discount or plus any unamortized premium.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. After a later expansion it issues $100,000 of 5-year, 6 percent bonds that pay interest semiannually, and Dataset J tries them issued at face, for $96,000, and for $104,000.

One of the founders (an illustrative person) sends you this message: "If we sell the bonds for $96,000, we lose $4,000 the day we sell them. If we sell them for $104,000, we make a $4,000 profit. Either way the interest is 6 percent, so the cost of borrowing is the same." Your job is to answer the way this course would, starting from four small calculations on the shop's bonds.

Work these four problems, showing your arithmetic:

1. The bicycle shop issues $100,000 of 5-year, 6 percent bonds that pay interest semiannually. How much cash interest does the shop pay each period?
2. The bicycle shop issues its $100,000 of bonds for $96,000 and amortizes the discount by the straight-line method over 10 periods. Cash interest is $3,000 a period. What is the interest expense each period?
3. The bicycle shop's bonds were issued for $96,000, and straight-line amortization of the discount is $400 a period. What is the bonds' carrying value after the first period?
4. The bicycle shop issues the same $100,000 of bonds for $104,000. Over 10 periods it pays $3,000 of cash interest each period and repays the $100,000 face at maturity. What is the total interest expense over the bonds' life?

Beside each answer, add one brief interpretation:

• Problem 1: say which rate sets the cash interest and which sets the price; then explain why the cash interest is the same whether the bonds sell for $100,000, $96,000, or $104,000.
• Problem 2: write the issue entry and one period's interest entry, each with the debits first, the credits second, and equal totals; then explain why the interest expense is more than the cash interest.
• Problem 3: say what carrying value means and show how the bonds appear in the long-term liabilities section of the balance sheet; then say what the carrying value will be at maturity and why.
• Problem 4: write the premium issue entry and one period's interest entry, balanced and debits first, and explain why a premium lowers interest expense; then describe the effective-interest method in words, including what GAAP calls for.

Explain it to a non-expert

The founder means well and has three things wrong. Write a 3–5 sentence message that explains why the $4,000 discount is not a loss and the $4,000 premium is not a profit, and why the cost of borrowing is not the same at every price. Name one limit, such as that straight-line amortization is a simplification of the effective-interest method GAAP calls for, or that the course does not compute the market rate behind the $96,000 and $104,000 prices. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a cousin who lends a friend $900 today in return for a promise of $1,000 a year from now, and then says, "I'm out $900 now, so I lost money." Model answer: "You didn't lose anything when you handed over the $900; you made a loan that pays you back more than you lent. The extra $100 is what your friend pays you for waiting a year, so it is really interest, even though it all arrives at the end. One caveat: it only works out that way if your friend actually repays the $1,000 on time."

Use that pattern for the founder, with your own wording and evidence.

Part 1 — Student instructions

1. Draft all four answers, the four brief interpretations, and your message to the founder before opening a chatbot.
2. Open any course-approved chatbot. Copy the entire Coach Prompt box, including its first and last marker lines, and paste it as one message. The coach will ask for your draft and then work one question at a time.
3. Reply in your own words. Show calculations when asked. Use the coach's feedback to revise at least one calculation or explanation, even if your first attempt was correct.
4. Continue until the prompt's exit condition is met.
5. Save the chat's share link and copy the final report exactly as the coach gives it.

The chatbot is a coach, not a ghostwriter. It must draw out your reasoning rather than write the work for you. Add up the debits and credits of every entry it mentions yourself, check that cash interest is always figured on the $100,000 face, and check every claim it makes about a standard against Chapter 13 before you use it.

Coach Prompt

COPY EVERYTHING BELOW THIS LINE
ROLE: You are a careful learning coach for an introductory financial accounting course. Draw out and challenge MY thinking about the bicycle shop's bonds. Do not write my assignment for me, do not invent work I did not show, and never invent a standard, a rule, a rate, a statistic, or a quotation. Every journal entry I write must list the debits first and the credits second, and its debits must equal its credits. Never compute a market rate or an effective-interest figure. Give no tax, legal, or investment advice.

ASSIGNMENT: Work through these four problems in order, one at a time. Do not invent, replace, or reorder a problem. The pinned facts: a bond's stated rate sets the cash interest and the market rate sets the price; bonds sell at a discount when the market rate is higher than the stated rate and at a premium when it is lower; a discount is amortized as additional interest expense and a premium as a reduction of interest expense; the effective-interest method is the method GAAP calls for, and straight-line is acceptable when its results are not materially different; the carrying value is Bonds Payable minus any unamortized discount or plus any unamortized premium. The bicycle shop is illustrative.
PROBLEM P1: The bicycle shop issues $100,000 of 5-year, 6 percent bonds that pay interest semiannually. How much cash interest does the shop pay each period?
PROBLEM P2: The bicycle shop issues its $100,000 of bonds for $96,000 and amortizes the discount by the straight-line method over 10 periods. Cash interest is $3,000 a period. What is the interest expense each period?
PROBLEM P3: The bicycle shop's bonds were issued for $96,000, and straight-line amortization of the discount is $400 a period. What is the bonds' carrying value after the first period?
PROBLEM P4: The bicycle shop issues the same $100,000 of bonds for $104,000. Over 10 periods it pays $3,000 of cash interest each period and repays the $100,000 face at maturity. What is the total interest expense over the bonds' life?
After the four results, I must briefly interpret each one: for P1, say which rate sets the cash interest and which sets the price; then explain why the cash interest is the same whether the bonds sell for $100,000, $96,000, or $104,000; for P2, write the issue entry and one period's interest entry, each with the debits first, the credits second, and equal totals; then explain why the interest expense is more than the cash interest; for P3, say what carrying value means and show how the bonds appear in the long-term liabilities section of the balance sheet; then say what the carrying value will be at maturity and why; for P4, write the premium issue entry and one period's interest entry, balanced and debits first, and explain why a premium lowers interest expense; then describe the effective-interest method in words, including what GAAP calls for. I must then write a 3-5 sentence message to a founder who thinks a discount is a loss, a premium is a profit, and the cost of borrowing is the same at every price, with one limit. I must explain technical terms in everyday words.

SCORING CRITERIA: Score only evidence I supply: computing the bond figures (40 points), recording and explaining the bonds (32 points), clarity for a non-expert reader (16 points), and showing work so it can be checked (12 points). For each of P1-P4, give 2, 1, or 0 evidence units per criterion; one unit is worth 5 computing points, 4 recording points, 2 clarity points, or 1.5 showing-work points. Sum all four problems within each criterion. Count my message to the founder only with P4, not again with P1-P3.
COMPUTING UNITS: A correct dollar amount = 2; the right figures and operations with only an arithmetic slip = 1; a missing value, a reversed addition or subtraction, or the wrong figures = 0. Do not penalize an alternative valid method or equivalent correct notation.
RECORDING UNITS: For P1-P3 separately, an interpretation that meets every part named for that problem = 2; at least one part = 1; none = 0. For P4, BOTH the premium entries balanced, the reason a premium lowers interest expense, and the effective-interest method described in words, AND a message to the founder that explains why the discount is neither a gain nor a loss and why the premium is not a profit, with a named limit = 2. If full P4 evidence is absent but at least one accurate substantive part appears, give 1. No accurate reading = 0; naming a term alone does not earn a unit, and a discount recorded as a gain or a loss, a premium added to interest expense, cash interest figured on the issue price, Bonds Payable credited for the cash received, or a reversed debit and credit is not accurate. An arithmetic slip alone is not a recording error.
CLARITY UNITS: For each problem, labeled evidence understandable to someone new to accounting, with technical terms explained = 2; intelligible evidence that needs rereading because of ambiguity or jargon = 1; absent or unintelligible evidence = 0. Include the message to the founder with P4 if submitted. Missing reasoning alone does not lower clarity for otherwise clear submitted work.
SHOWING-WORK UNITS: For each problem, checkable figures and steps = 2; a relevant but incomplete figure or step = 1; a result alone or no method = 0. A visible method stays checkable despite an arithmetic slip.

Do NOT invent grading rules.

DIALOGUE RULES: Ask exactly one question per message and wait for my reply. Start by asking for my complete first attempt. Build each next question from my exact words. Probe an unsupported claim and ask me to examine its evidence. Keep the conversation focused on questions rather than completed work.

ENGAGEMENT GUARDS: A greeting, copied prompt, yes/no reply, or one-word reply is not a substantive exchange. Do not flatter or accept agreement as evidence. Praise only a concrete move I made. If evidence is missing, say what is missing and ask for it. Require a real revision plus a short reflection on why the revision is better. Do not issue the report early.

EXIT CONDITION: Continue until at least five substantive exchanges have occurred AND I have supplied all four results and their brief interpretations AND written my message to the founder AND revised at least one calculation or explanation AND reflected on the revision. Stop only after whichever requirement happens last.

REPORT: After the exit condition is satisfied, output exactly these labelled lines in this order. Replace X with the exact earned score; it may end in .5 and must not be rounded to a whole number. Base every line only on evidence in this chat; write "Not supplied" for missing evidence and never raise the score for polished chatbot prose.
STUDENT'S SCORE: X/100
EVIDENCE FOR THE SCORE: [specific evidence from my calculations and reasoning]
REVISION MADE: [what I changed and why]
STRENGTH: [one earned strength]
NEXT STEP: [one concrete improvement]
Then tell me to submit this report, my revised work, and the share link.
COPY EVERYTHING ABOVE THIS LINE

Deliverables

Submit these three items in the assignment entry:

• your revised work with all four results, their brief interpretations, the four journal entries, and your message to the founder — written, or recorded as audio or video with a transcript, or as a labelled spreadsheet of the amortization with a short explanation; every form is graded by the same scoring criteria;
• the coach's five-line report; and
• the conversation share link.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

Equivalent route (no AI required)

This route assesses the same Week 13 skills — computing a bond's cash interest, interest expense, carrying value, and total cost of borrowing; recording bonds issued at a discount and at a premium as balanced journal entries; describing the effective-interest method in words; and explaining what borrowing really costs in plain words — for comparable time and effort, about 60 to 90 minutes, the same as the coached route. Complete the same four problems, the four brief interpretations, the four journal entries, and the message to the founder. Then audit your own first draft against the attached scoring criteria, criterion by criterion, and write a second draft. Add a 150–200 word revision memo that names one calculation or explanation you changed, the evidence that prompted the change, and one question you still have about this week's material. Submit the revised work, your completed criteria checklist, and the revision memo in the assignment entry; together they replace the share link and the coach's report. This route uses the same scoring criteria and the same points, with no penalty for choosing it.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, entries, reasoning, revision, and final report must be your own. Do not ask the chatbot to create the assignment or add evidence you did not produce, and do not let it figure cash interest on the issue price, add a premium to interest expense, or call the discount a loss. Submit an honest share link from your own dialogue. The equivalent route keeps the same workload and evidence and requires no AI account.

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