When bonds are sold at a premium, if the annual straight-line amortization amount is compared to...
When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:
Multiple Choice
- Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
- Higher than the effective interest amount every year.
- Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
- Less than the effective interest amount every year.
Homework Answers
Higher than the effective interest amount in the early years and less than the effective interest amount in the later years
Explanation: As in example you can see the premium amount in straight-line amortization method higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
| Example | ||||||||||
| Bonds Face Value | $100,000 | |||||||||
| No. of Periods | 10 | |||||||||
| Payment of Interest 9% | $9,000 | |||||||||
| yield to maturity | 8% | |||||||||
| Issue Price | $106,710.08, | |||||||||
| Effective Interest Method | Straight-line Method | |||||||||
| Year | Cash Paid | Interest Expense | Premium Amortized | Carrying Amount of Bonds | Year | Cash Paid | Interest Expense | Premium Amortized | Carrying Amount of Bonds | |
| 0 | $106,710.08 | 0 | $106,710.08 | |||||||
| 1 | $9,000.00 | $8,536.81 | $463.19 | $106,246.89 | 1 | $9,000.00 | $8,328.99 | $671.01 | $106,039.07 | |
| 2 | $9,000.00 | $8,499.75 | $500.25 | $105,746.64 | 2 | $9,000.00 | $8,328.99 | $671.01 | $105,368.06 | |
| 3 | $9,000.00 | $8,459.73 | $540.27 | $105,206.37 | 3 | $9,000.00 | $8,328.99 | $671.01 | $104,697.06 | |
| 4 | $9,000.00 | $8,416.51 | $583.49 | $104,622.88 | 4 | $9,000.00 | $8,328.99 | $671.01 | $104,026.05 | |
| 5 | $9,000.00 | $8,369.83 | $630.17 | $103,992.71 | 5 | $9,000.00 | $8,328.99 | $671.01 | $103,355.04 | |
| 6 | $9,000.00 | $8,319.42 | $680.58 | $103,312.12 | 6 | $9,000.00 | $8,328.99 | $671.01 | $102,684.03 | |
| 7 | $9,000.00 | $8,264.97 | $735.03 | $102,577.09 | 7 | $9,000.00 | $8,328.99 | $671.01 | $102,013.02 | |
| 8 | $9,000.00 | $8,206.17 | $793.83 | $101,783.26 | 8 | $9,000.00 | $8,328.99 | $671.01 | $101,342.02 | |
| 9 | $9,000.00 | $8,142.66 | $857.34 | $100,925.92 | 9 | $9,000.00 | $8,328.99 | $671.01 | $100,671.01 | |
| 10 | $9,000.00 | $8,074.07 | $925.93 | $100,000.00 | 10 | $9,000.00 | $8,328.99 | $671.01 | $100,000.00 | |
| Cash Paid | $9,000 | Premium Amortized | ||||||||
| ($100,000 x 9%) | 6,710.08/10 = $671.008 | |||||||||
| Interest Expense | 8536.81 | |||||||||
| ($106,710.08 x 8%) | ||||||||||
| Premium Amortized | $463.19 | |||||||||
| (cash Paid - Int Exp.) | ||||||||||
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When bonds are sold at a premium, if the annual straight-line
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