Question

Quatro Co. issues bonds dated January 1, 2017, with a par value of $870,000. The bonds’ annual contract rate is 9%, 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 8%, and the bonds are sold for $892,789.

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?

amount repaid:
# of payments #
per value at maturity:
total repaid:
less amount borrowed:
total bond interest expense

3. Prepare an amortization table for these bonds using the effective interest method to amortize the premium.

semi interest period end	cash interest paid	bond interest expense	premiuem amortization	unamortized premieum	carrying value
1/1/2017
6/30/2017
12/31/2017
6/30/2018
12/31/2018
6/30/2019
12/31/2019

Answer 1

Solution 1:

Premium on bonds at issuance = Bond Issue price - Face value = $892,789 - $870,000 = $22,789

Solution 2:

Total bond interest expense Over life of bonds:
Amount Repaid:
6 Payments of ($870,000*9%*6/12=$39,150)	$2,34,900
Par Value at maturity	$8,70,000
Total Repayments	$11,04,900
Less: Amount Borrowed	$8,92,789
Total Bond interest Expense	$2,12,111

Solution 3:

semi interest period end	cash interest paid	bond interest expense	premiuem amortization	unamortized premieum	carrying value
01-01-2017				$22,789	$8,92,789
6/30/2017	$39,150	$35,712	$3,438	$19,351	$8,89,351
12/31/2017	$39,150	$35,574	$3,576	$15,775	$8,85,775
6/30/2018	$39,150	$35,431	$3,719	$12,056	$8,82,056
12/31/2018	$39,150	$35,282	$3,868	$8,188	$8,78,188
6/30/2019	$39,150	$35,128	$4,022	$4,165	$8,74,165
12/31/2019	$39,150	$34,985	$4,165	$0	$8,70,000