Question

Presented below are two independent situations. (a) Marin Co. sold $1,840,000 of 12%, 10-year bonds at 105 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Marin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2020, and December 31, 2020. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded:

Answer 1

Under straight-line method:

i, Premium amortization on each interest payment:

Issue price (1,840,000 x 1.05)	$1,932,000
Face value	($1,840,000)
Premium on bonds payable	$92,000
÷ No. of payments (10 years x 2 times)	20
Premium amortization each period	$4,600

ii.Interest payment:

Interest payment = Face value x Interest rate

= $1,840,000 x 12% x 6/12

= $110,400

iiii. Interest expense:

Interest expense = Interest payment - Premium amortization each period

= $110,400 - $4,600

= $105,800

Under straight-line to amortization premium or discount, Interest expense is same to all the periods.

Hence, interest expense on July 1,2020 is $105,800 and Dec 31,2020 is $105,800.