Question

Exercise 10-7 Straight-Line: Amortization of bond premium LO P3 Quatro Co. issues bonds dated January 1, 2017, with a par value of $900,000. The bonds’ annual contract rate is 10%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $947,165. 1. What is the amount of the premium on these bonds at issuance? 2. How much total bond interest expense will be recognized over the life of these bonds? 3. Prepare an amortization table for these bonds; use the straight-line method to amortize the premium.

Answer 1

1
Premium	47165	=947165-900000
2
Total interest expense over life of bonds
6 payments of $45000	270000
Par value at maturity	900000
Total repaid	1170000
Less: Amount borrowed	947165
Total bond interest expense	222835
3
Semiannual Interest period end	Unamortized Premium	Carrying value
01/01/2017	47165	947165
06/30/2017	39304	939304
12/31/2017	31443	931443
06/30/2018	23582	923582
12/31/2018	15721	915721
06/30/2019	7860	907860
12/31/2019	0	900000
Workings:
Semiannual Interest payment	45000	=900000*10%/2
Semiannual premium amortization	7861	=47165/6