Question

On January 1, $995,000, 5-year, 10% bonds, were issued for $965,150. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is a.$5,970 b.$49,750 c.$2,985 d.$29,850

Answer 1

In order to calculate the semiannual amortization of the discount amount:-

Step 1:- Calculate the discounts on bonds issued

Discount on bonds issued = $995,000 - $965,150

Discount on bonds issued = $29,850

Step 2:- Calculate the number of interest payments

Interest payments = 5 years * 2 payments per year

Interest payments = 10 payments

Step 3:- Calculate the semiannual amortization

Semi annual amortization = $29,850/10 payments

Semi annual amortization = $2,985

Based on the above calculation, the correct answer is Option C - $2,985.

Option A is incorrect. $5,970 is the total amortization expense per year. However, since the interest is paid semi annually, this answer is not correct.

Option B is incorrect. $49,750 is an incorrect based on the above calculations.

Option D is incorrect because $29,850 is the total discount amortization value throughout the bonds life.