Question

Franklin Corporation issues $82,000, 10%, five-year bonds on January 1 for $85,700. Interest is paid semiannually...

Franklin Corporation issues $82,000, 10%, five-year bonds on January 1 for $85,700. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is

a.$3,650

b.$3,280

c.$6,560

d.$3,730

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Answer #1

Option (d) is correct

Under the straight line method, bond premium is amortized over the life of the bond. Here,

Bond premium = $85700 - $82000 = $3700

Life of the bond = 5 * 2 = 10 semi annual years

Straight line amortization of bond premium = $3700 / 10 = $370

Semi annual cash payment of interest = 10% * $82000 * 6 /12 = $4100

Interest expense under straight line method is:

Interest expense = Cash paid for interest - Premium amortization

Interest expense = $4100 - $370 = $3730

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