Answer:
$37,000
Explanation:
Bonds issued at a discount:
When bonds are issued at a discount,
then interest expense/annual amortization amount = cash interest paid + amortization of discount
Bond Issued t a Premium
When bonds are issued at a premium,
then annual Amortization = interest expense- amortization of premium
Step One: Determine if the Bonds were issued at a Premium or at a Discount
$500,000, 5-year, 6% bonds, were sold for $465,000. The bonds were issued at a discount.
The formula to use will be as follows:
Annual Amortization= Interest expense + Amortized Discount
Step Two: Calculate the Interest and the amortized discount
Interest paid in cash = Face value ×the contractual interest rate
= $500,000 x 6% = $30,000 per year
Straight-line amortization per year = ($500,000 - $465,000)/5 = $7,000 per year
Therefore:
The annual amortization amount based on the formula since the bonds were issued at a discount
= $30,000 + 7,000 = $37,000
