Question

On January 1, 4 year bonds with a face value of $500,000 sold for 104. Stated interest on the bonds are 10% and is paid annually. What is the total amount of expense that will be recognized over the life of the bonds?

Answer 1

Par Value of Bonds Issued = 5,000 * 100 = 500,000

Premium on Bonds Payable = 5,000 * 4 = 20,000

As the life of the bonds issued is 4 year, therefore the premium on bond payable will be amortized in equally over the four years i.e. 20,000 / 4 = $ 5,000 per year

Amount of interest to be paid annually = 500,000 * 10% = 50,000

Date	Accounts	Debit	Credit
Dec. 31	Interest Expense	45,000
	Premium on Bonds Payable	5,000
	To Cash		50,000

Amount of interest expense that will be recognised in each year is $ 45,000. Thus, over the life of the bonds total (45,000*4) $180,000 will be expensed