In: Finance
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 |
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