Question: Quatro Co. issues bonds dated January 1,
Quatro Co. issues bonds dated January 1, 2015, with a par value of $400,000. The bonds’ annual contract rate is 13%, 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 12%, and the bonds are sold for $409,850.
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?
3. Prepare an amortization table like the one in Exhibit 14B.2 for these bonds; use the effective interest method to amortize the premium.
Exhibit 14B.2:
Transcribed Image Text:
A B D E EXHIBIT 14B.2 Bonds: $100,000 Par Value, Semlannual Interest Payments, Two-Year Life, 6% Semlannual Contract Rate, 5% Semlannual Market Rate Effective Interest Amortization of Bond (A) (B) (C) (D) (E) Premium Semlannual Cash Bond Interest Perlod-End Interest Interest Premlum Unamortized Carrying $104,000 Carying value Pald Expense Amortization Premlum Value 6% x $100,000 5% x Prior F) (A) – (B) Prior P) - (C) $100,000 + P) (0) 12/31/2015 $3,546 $103,546 $100,000 (1) 6/30/2016 $6,000 $5,177 $ 823 2,723 102,723 (2) 12/31/2016 6,000 5,136 864 1,859 101,859 10 (3) 6/30/2017 6,000 5,093 907 952 100,952 $96,000 11 5,048 $20,454 12/31/2017 6,000 952 100,000 12 $24,000 $3,546 Bonds Payable 12/31/2015 100,000 Column (A) is the par value ($100,000) multiplied by the semiannual contract rate (6%). Column (B) is the prior period's carrying valuc multiplied by the semiannual market rate (5%). Column (C) is the difference between interest paid and bond interest expense, ar [(A) – (B)). Column (D) is the prior period's unamortized premium less the current period's premium amortization. Column (E) is the par value plus unamortized premium, or ($100,000 + (D)). 6/30/2016 12/31/2016 630/2017 |12/31/2017 100,000 Premium on Bonds Payable value after deducting the amortized premium in column C from the prior period's carrying value. Column D shows the premium's reduction by periodic amortization. When the issuer makes the first semiannual interest payment, the effect of premium amortization on bond interest expense and bond 125/2016 864 liability is recorded as follows: 1231/2015 3,546 630/2016 823 630/2017 907 1231/2017 952 l12312017 2016 Assets - Liabilities + Equity -823 June 30 Bond Interest Expense 5,177 -6,000 -5,177 Premium on Bonds Payable. 823 + Cash..... 6,000 To record semiannual Interest and premlum amortization (efféctive interest method). t2012017
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