Interest method of amortisation On 1 January x2, Dorrit Company issues A5 million of 2.5% bonds, due 31 December x5. They are priced at 91.14 to yield 5% to maturity. Dorrit amortises any initial discount (or premium) by the interest method and reports the bonds on the balance sheet at amortised cost. The company’s financial year ends on 31 December. Interest is payable annually.

Required

(a) How much cash does Dorrit receive from the sale of the bonds?

(b) What is the total lifetime cost of the bonds to Dorrit over the four years to 31 December x5?

(c) What is the interest expense Dorrit reports in its income statement for x2 and for x3 with respect to the bonds?

(d) What is the carrying amount of the bonds in Dorrit’s balance sheet at the end of x2 and at the end of x3?

Check figure:

(c) Discount amortised in x2 A102,850 AppenedixLO1