Straight Line vs Effective Interest Amortization Methods Ranger Co. issues bonds dated January 1, information about...

Straight Line vs Effective Interest Amortization Methods

Ranger Co. issues bonds dated January 1, information about the bonds is below. Interest is paid semiannually on June 30 and December 31.
	Par	850,000
	Rate	12%
	Term	3
	Market Rate	10%
	Issue Price	893,131
	Semi annual interest	51,000

1. What is the amount of the premium on these bonds at issuance?

	Issue Price	893,131
	Par	850,000
	premium	43,131
		7,239	premium amoritized per period
2. How much total bond interest expense will be recognized over the life of these bonds?
	Total Bond Interest Expense Over Life of Bonds:
	Amount repaid:
		payments of
	Par value at maturity
	Total repaid
	Less amount borrowed
	Total bond interest expense

3. Prepare a straight-line amortization table for these bonds.

	Semiannual Interest Period-End	Unamortized Premium	Carrying Value
	1/1 yr 1	43,131	893,131
	6/30 yr 1	35,892	885,892
	1/1 yr 2	28,653	878,653
	6/30 yr 2	21,414	871,414
	1/1/ yr 3	14,175	864,175
	6/30 yr 3	6,936	856,936
	12/31 yr 3		849,687






3. Prepare an effective Interest: amortization of these bonds.
Semiannual Interest Period-End	Cash Interest Paid	Bond Interest Expense	Premium Amorization	Unamoritzed Premium	Carrying Value
1/1 yr 1
6/30 yr 1
1/1 yr 2
6/30 yr 2
1/1/ yr 3
6/30 yr 3
12/31 yr 3
Total

Expert Solution

Answer to Requirement 1.
Issue Price = $893,131
Par Value = $850,000

Premium on Bonds Payable = Issue Price - Par Value
Premium on Bonds Payable = $893,131 - $850,000
Premium on Bonds Payable = $43,131

Life of Bonds = 3 years or 6 semi-annual periods

Premium to be amortized semi-annually = $43,131 / 6
Premium to be amortized semi-annually = $7,189

jeff jeffy answered 2 years ago

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