Question

YaYa Company issued bonds with a contract interest rate of 10% and a face amount of $200,000.  The bonds mature in 15 years.  The market interest rate for bonds with the same degree of riskiness is 8% compounded annually.  These bonds were issued on January 1 of Year 1 at a price of $234,238.  Cash Interest payments are made annually on December 31, so the first interest payment was made on December 31 of Year 1.  YaYa uses the effective-interest method on its books.
What is the dollar amount of the bond premium or discount recorded on YaYa’s books after the cash payment of the last cash interest payment but before the payment of the face value of the bond? (Do not write the dollar sign).

Answer 1

A	B	C	D	E	F	G
DATE	INT PAYMENT(FACE VAL*10%)	INTEREST EXPENSE(PREVIOUS BOOK VAL IN G*8%)	AMORTISATION(B-C)	BALANCE IN PREMIUM	FACE VALUE	BOOK VALUE
End of Yr				34238	200000	234238
1	20000	18739	1261	32977	200000	232977
2	20000	18638	1362	31615	200000	231615
3	20000	18529	1471	30144	200000	230144
4	20000	18412	1588	28556	200000	228556
5	20000	18284	1716	26840	200000	226840
6	20000	18147	1853	24988	200000	224988
7	20000	17999	2001	22987	200000	222987
8	20000	17839	2161	20826	200000	220826
9	20000	17666	2334	18492	200000	218492
10	20000	17479	2521	15971	200000	215971
11	20000	17278	2722	13249	200000	213249
12	20000	17060	2940	10309	200000	210309
13	20000	16825	3175	7133	200000	207133
14	20000	16571	3429	3704	200000	203704
15	20000	16296	3704	0	200000	200000
Total	300000	265762	34238

Last interest payment was of 20,000 out of which 16,296 was debited to interest expense and 3,704 was debited to premium on bonds payable account. After this entry the balance in premium on bonds payable shall become zero (as shown in table above) and carrying value/book value of bonds shall be face value i.e. 200,000 which will be now repaid to the bond holders.

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