Question

Quatro Co. issues bonds dated January 1, 2017, with a par value of \(400,000. The bonds’ annual contract rate is 13%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for \)409,850.

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 like the one in Exhibit 10.11 for these bonds; use the straight-line method to amortize the premium

Short answer

(1) Premium on bonds payable equals $9,850.

(2) Total interest expense equals $146,150

(3) Amortizable table is prepared in Step 3.

Step-by-step solution

:(a) Calculation of premium on bonds payable        

$\begin{array}{rcl}\mathbf{Premium}\mathbf{}\mathbf{on}\mathbf{}\mathbf{Bond}\mathbf{}\mathbf{payable}& \mathbf{=}& \mathbf{Issue}\mathbf{}\mathbf{price}-\mathbf{Par}\mathbf{}\mathbf{value}\\ & \mathbf{=}& \mathbf{\$}\mathbf{409}\mathbf{,}\mathbf{850}-\mathbf{\$}\mathbf{400}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{850}\\ & & \end{array}$

:(a) Calculation of bond interest expense

Six payments of $26,000 (6 pymts × [$ 4000,000 × 0.13 × 1∕2 yr]	$156,000
Less Premium	$9,850
Total bond interest expense	$ 146,150
Bond interest expense ($146,150 / 6)	$24,358

:(c) Amortization schedule prepared in Step 3.

Bonds: $400,000 Par Value, Semi -annual Interest Payments, Three-Year Life, 6.5% Semi-annual Contract Rate, 6% Semi-annual Market Rate
Semi-annual Interest Period-End	(A) Cash Interest Paid 6.5% × $400,000	Bond Interest Expense	(C) Premium Amortization (A) – (B)	(D) Premium Prior (D) – (C)	(E) Carrying Value $400,000 + (D)
01/01/2017				$9,350	$ 409,350
30/06/2017	$ 26,000	$ 24,358	$ 1,642	$ 7,708	$ 407,708
31/12/2017	$ 26,000	$ 24,358	$ 1,642	$ 6,066	$ 406,066
30/06/2018	$ 26,000	$ 24,358	$ 1,642	$,4,424	$ 404,424
31/12/2018	$ 26,000	$ 24,358	$ 1,642	$ 2,782	$ 402,782
30/06/2019	$ 26,000	$ 24,358	$ 1,642	$ 1,642	$ 401,642
31/12/2019	$ 26,000	$ 24,358	$ 1,642	-	$ 400,000