Question

Bond Amortization = Bond Discount or Premium / Number of Interest Periods Interest Paid = Face...

• Bond Amortization = Bond Discount or Premium / Number of Interest Periods

• Interest Paid = Face Amount of Bonds x Stated Interest Rate

• Interest Expense = Interest Paid + Discount ( or – Premium) Amortization

On October 1, 2018 ABC issued 5%, 10-year bonds with a face value of \$4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. What is interest expense for 2018? Assume ABC Company uses straight-line amortization.

N =

Bond Amortization = Bond Premium / Number of Interest Periods =

Interest Paid = Face Amount of Bonds x Stated Interest Rate =

Interest Expense = Interest Paid - premium amortization =

 N = 20 Bond Premium = (\$4000000*104/100) -40000000 =\$160000 Bond Amortization = Bond Premium / Number of Interest Periods =\$160000/20 = \$8000 Interest Paid = Face Amount of Bonds x Stated Interest Rate = \$4000000*5%/2 =\$100000 Interest Expense = Interest Paid - premium amortization = \$100000-8000 =\$92000

SOLUTION :

Face value of the bond = 4000000

Premium amount = 4000000 * (104 - 100)/100 = 160000

Maturity period of the bond = 10 years.

Coupon rate is 5% semi-annually.

Hence, coupon amount per period of payments

= Interest expense on the bond per period

= 4000000 * 0.05/2

= 100000

Premium of 160000 is to be amortised for 20 semi-annual periods

As per straight line method amortisation per period

= 160000 / 20

= 8000

So, total expense (considered as interest) per period

= Coupon amount - amortised premium

= 100000 -  8000

= 92000.

Bond  issued on October 1, 2018, so in the year 2018 coupon is paid only once on Oct. 1, 2018 itself.

Hence interest expense in 2018 :

= Coupon amount - Amortised premium

= 100000 - 8000

answered by: Tulsiram Garg

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