Question

Exercise 10-9 Straight Line l: Amortization

Exercise 10-9 Straight-Line: Amortization of bond premium LO P3 Quatro Co. issues bonds dated January 1, 2019, with a par value of $700,000. The bonds' annual contract rate is 13%, 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 12%, and the bonds are sold for $717,237. 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 a straight-line amortization table for these bonds. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the amount of the premium on these bonds at issuance Premium Required 2 >

Answer 1

Ans 1 Sales Proceeds Less: Face Value Premium $7,17,237 $7,00,000 $17,237 Ans 2 Total Bond Interest Expense Over Life of Bond: Amount repaid 6 payment of [($700000 x 13%)/2 x 6] Par Value at maturity Total Repaid Less: amount borrowed Total Bond Interest Expense $2,73,000 $7,00,000 $9,73,000 $7,17,237 $2,55,763 Ans 3 Straight Line Amortisation Table In straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period. Semi-annual Unamortised interest Period Carrying Value Discount end 01/01/2019 $17,237 $7,17,237 06/30/2019 $14,364 $7,14,364 12/31/2019 $11,491 $7,11,491 06/30/2020 $8,618 $7,08,618 12/31/2020 $5,745 $7,05,745 06/30/2021 $2,872 $7,02,872 12/31/2021 $2,872 $7,00,000