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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

Solutions

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



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