Question

Quatro Co. issues bonds dated January 1, 2019, 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 effective interest amortization table for these bonds.

Answer 1

Answer:

1.) $9,850

2.) $146,150

3.) see explanation

Explanation:

Amount of premium issue on the bond:

Sale price of bond - par value of bond

$409,850 - $400,000 = $9,850

2.)Total interest expense on bond over the life time of bond;

Repayment amount

Semiannual interest = (13%÷2) × $400,000

0.065 × 400,000 = $26,000

For three years :

$26,000 × 6 = $156,000

$156,000+$400,000(par value) =$556, 000

Total interest expense:

$556,000 - $409,850 = $146,150

3.)

S/annual PE- - - - unarmortized P------CV of bond

1/1/19 - - - - - - - - - 9,850 - - - - - - - - - - 409,850

30/6/19-------------- 8,208 - - - - - - - - - - 408, 208

31/12/19 - - - - - - - 6566 - - - - - - - - - - - 406566

30/6/20 - - - - - - -4924 - - - - - - - - - - - 404924

31/12/20 - - - - - - 3282 - - - - - - - - - - - 403282

30/6/21 - - - - - - - 1640 - - - - - - - - - - - - 401640

31/12/21 - - - - ------ 0 - - - - - - - - - - - - - 400000

S/annual PE = Semiannual payment end

Unarmortized P = Unarmortized premium

CV of bond = carrying value of bond

Answer 2

Answer:

$9850

$ 146,172  

Explanation:

The amount of premium on the bond issuance is the difference between the cash proceeds from the issue and the face value of the bond i.e $9,850($409,850-$400,000).

The total expense that would be recognized over the life of the bond is $146,172   as shown in the expense column of the attached amortization schedule.

Find attached effective interest amortization table.

The final balance is $22 more than the face value due rounding error.

Download xlsx