Question

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.

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