Ramzi corp. issued $6,000,000 of 8% debentures on May 1, 2006 and received cash totaling $5,323,577....

Ramzi corp. issued $6,000,000 of 8% debentures on May 1, 2006 and received cash totaling $5,323,577. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2014. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%.

Calculate the amount of discount amortization during the first year (5/1/06 through 4/30/07) these bonds were outstanding. (round to the nearest dollar.)

	a.	discount amortization is $ 53,067
	b.	discount amortization is $ 52,067
	c.	discount amortization is $ 52,667
	d.	discount amortization is $ 53,667

Expert Solution

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Ramiz Corp.	Amount $	Note
Par value of bonds	6,000,000.00	G
Issue value	5,323,577.00	H
Unamortized discount	676,423.00	I=G-H

Interest rate	8%	J
Annual Interest	480,000.00	*K=GJ**
Semi Annual Interest	240,000.00	L=K/2

	A	*B=F10%/2**	C=B-A	D=D-C	E	F=E-D
Date	Interest payment at 8%	Interest expense at 10%	Amortization of bond discount	Debit balance in bond discount	Credit balance in bonds payable	Book value of bonds
	Credit Cash	Debit Interest expense	Credit bond discount
May 1 2006				676,423.00	6,000,000.00	5,323,577.00
Nov 1 2006	240,000.00	266,178.85	26,178.85	650,244.15	6,000,000.00	5,349,755.85
May 1 2008	240,000.00	267,487.79	27,487.79	622,756.36	6,000,000.00	5,377,243.64
Total discount amortized			53,666.64

So answer is option D. Discount amortization is $ 53,667.

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