Question

On December 31, 2018, P. Star Corporation issued $300,000, 12 % , 15-year bonds for $346,120 cash when the market rate of interest was 10%. The bonds pay interest semi-annually each June 30 and December 31. P. Star uses the effective interest method of amortization to amortize any premium or discount. Was the bond issued at a premium or a discount. Type in 1 for discount or 2 for premium. exact number, no tolerance

Answer 1

The bond was issued at a premium. Dollar amount of premium = $346,120-$300,000 =$46,120

в с D E | Date Issue 6/30/19 12/31/19 6/30/20 12/31/20 stated interest Effective interest | Amortization Carrying value $ 346,120.00 $ 18,000.00 $ 17,306.00 $ 694.00 $ 345,426.00 $ 18,000.00 $ 17,271.30 $728.70 $ 344,697.30 $ 18,000.00 $ 17,234.87 $ 765.13 $343,932.17 $ 18,000.00 $ 17,196.61 $ 803.39 $343,128.77

Working note:

B C D =C4-D4 Date Stated interest Effective interest Amortization Carrying value Issue 346120 6/30/19 =300000*6% =F3*5% =F3-E4 12/31/19 =300000*6% =F4*5% =C5-D5 =F4-E5 6/30/20 =300000*6% =F5*5% =C6-D6 =F5-E6 12/31/20 =300000*6% =F6*5% =C7-07 =F6-E7

Interest expense reported on December 31, 2019 = $17,306+$17,271.30 = $34,577.30 Interest expense reported on December 31, 2020 = $17,234.87+$17,196.61 = $34,431.47