Question

Exercise 10-9 Straight-Line: Amortization of bond premium LO P3 Quatro Co. Issues bonds dated January 1, 2019, 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 a straight-line amortization table for these bonds. Complete this question by entering your answers in the tabs below. Required Required 2 Required 3 What is the amount of the premium on these bonds at issuance? Required 2 >

Answer 1

1.

Par value of bonds = $900,000

Issue price of bonds = $947,165

Premium on bonds payable = Issue price of bonds - Par value of bonds

= 947,165 - 900,000

= $47,165

2.

Semi annual interest payment = 900,000 x 10% x 6/12

= $45,000

Total bond interest expense over the life of the bonds

Amount repaid
6 payments of $45,000	270,000
Par value at maturity	900,000
Total repayments	1,170,000
Less amount borrowed (from part 1)	- 947,165
Total bond interest expense	$222,835

3.

Semi annual bond premium amortization = Premium on bonds payable/Number of semi annual interest payments

= 47,165/6

= $7,861

Straight line amortization table

Date	Interest payment (i)	Amortization of premium (ii)	Interest expense (i) - (ii)	Present value of bonds
01/01/2019				947,165
06/30/2019	45,000	7,861	37,139	939,304
12/31/2019	45,000	7,861	37,139	931,443
06/30/2020	45,000	7,861	37,139	923,582
12/31/2020	45,000	7,861	37,139	915,721
06/30/2021	45,000	7,861	37,139	907,860
12/31/2021	45,000	7,860	37,140	900,000

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