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Question 6 Assume that a bond is issued with the following characteristics: Date of bonds: January...

Question 6

Assume that a bond is issued with the following characteristics:

Date of bonds: January 1, 2005; maturity date: January 1, 2010; face value: $200,000; face interest rate: 10 percent paid semiannually (5 percent per period); market interest rate: 8 percent (4 percent per semiannual period); issue price: $216,222; bond premium is amortized using the straight-line method of amortization. What is the amount of bond premium amortization for the June 30, 2005, adjusting entry?

A- $811

B- $1,622

C- $8,111

D- $16,222
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Answer #1

Answer:

Correct answer is:

B- $1,622

Explanation:

Issue price = $216,222

Face value = $200,000

Date of bonds: January 1, 2005; maturity date: January 1, 2010

Interest rate: 10 percent paid semiannually

Number of semiannual payments = 5 * 2 = 10

Bond Premium = Issue price - Face value = $216,222 - $200,000 = $16,222

Bond premium is amortized using the straight-line method of amortization

Amount of bond premium amortization for the June 30, 2005, adjusting entry = Bond Premium / Number of periods = $16,222 /10 = $1,622.20 = $1,622 (rounded off to nearest dollar)

Hence option B is correct.

Option D is incorrect since $16,222 is total bond premium.

As calculated above amortization per period is $1622 hence option A and C are incorrect.

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