Question

Quatro Co. issues bonds dated January 1, 2017, with a par value of $820,000. The bonds’...

Quatro Co. issues bonds dated January 1, 2017, with a par value of $820,000. The bonds’ annual contract rate is 10%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $862,972.

1. What is the amount of the premium on these bonds at issuance?
2. How much total bond interest expense will be recognized over the life of these bonds?
3. Prepare an amortization table for these bonds using the effective interest method to amortize the premium.

Homework Answers

Answer #1
1
Premium 42972 =862972-820000
2
Total interest expense over life of bonds
6 payments of $ 41000 246000
Par value at maturity 820000
Total repaid 1066000
Less: Amount borrowed 862972
Total bond interest expense 203028
3
Semiannual Interest Period­End Cash Interest Paid Bond Interest Expense Premium Amortization Unamortized Premium Carrying Value
01/01/2017 42972 862972
06/30/2017 41000 34519 6481 36491 856491
12/31/2017 41000 34260 6740 29751 849751
06/30/2018 41000 33990 7010 22741 842741
12/31/2018 41000 33710 7290 15451 835451
06/30/2019 41000 33418 7582 7869 827869
12/31/2019 41000 33131 7869 0 820000
Total 246000 203028 42972
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