Question

Quatro Co. issues bonds dated January 1, 2019, with a par value of $880,000. 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 $901,670. 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 a straight-line amortization table for these bonds

Answer 1

Answer :-

1
Premium	21670	=901670-880000
2
Total interest expense over life of bonds
6 payments of $ 57200	343200
Par value at maturity	880000
Total repaid	1223200
Less: Amount borrowed	901670
Total bond interest expense	321530

3)

Bond amortisation schedule:

	Interest payment stated at face 6.5%	Interest payment at market rate 6.0%	Amortisation of bond premium	credit balance in bond premium	credit balance in bond payable	Book value of bond
1-Jan-13				21,670	880,000	901,670
30-Jun-13	57,200	54,100	3,100	18570	880,000	898,570
31-Dec-13	57,200	53914	3,286	15,284	880,000	895,284
30-Jun-14	57,200	53,717	3,483	11,801	880,000	891,801
31-Dec-14	57,200	53,509	3,691	8,110	880,000	888,110
30-Jun-15	57,200	53287	3,913	4,197	880,000	884,197
31-Dec-15	57,200	53,052	4,148	-	880,000	880,000