Question

Quatro Co. issues bonds dated January 1, 2019, with a par value of $850,000. The bonds' annual contract rate is 12%, 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 10%, and the bonds are sold for $893,131. 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 effective interest 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 $ 43,131 < Required 1 Required 2 >

Answer 1

1
Premium	43131	=893131-850000
2
Total interest expense over life of bonds
6 payments of $ 51000	306000
Par value at maturity	850000
Total repaid	1156000
Less: Amount borrowed	893131
Total bond interest expense	262869
3
Semiannual Interest period end	Cash interest paid	Bond interest expense	Premium amortization	Unamortized Premium	Carrying value
01/01/2019				43131	893131
06/30/2019	51000	44657	6343	36788	886788
12/31/2019	51000	44339	6661	30127	880127
06/30/2020	51000	44006	6994	23133	873133
12/31/2020	51000	43657	7343	15790	865790
06/30/2021	51000	43290	7710	8080	858080
12/31/2021	51000	42920	8080	0	850000
Total	306000	262869	43131
Workings:
Cash interest paid	51000	=850000*12%*6/12
Bond interest expense = Carrying value X 10% X 6/12
Bond interest expense:
06/30/2019	44657	=893131*10%*6/12
12/31/2019	44339	=886788*10%*6/12
06/30/2020	44006	=880127*10%*6/12
12/31/2020	43657	=873133*10%*6/12
06/30/2021	43290	=865790*10%*6/12
12/31/2021	42920	=858080*10%*6/12