Quatro Co. issues bonds dated January 1, 2015, with a par value of $790,000. The
ID: 2405549 • Letter: Q
Question
Quatro Co. issues bonds dated January 1, 2015, with a par value of $790,000. 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 $810,694. 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 for these bonds; use the straight-line method to amortize the premium. (Round your intermediate calculations to the nearest dollar amount.)
Explanation / Answer
Answer:
.1. What is the amount of the premium on these bonds at issuance?
premium on these bonds at issuance
= 810,694-790,000
=$20694
premium on these bonds at issuance=$20694
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2. How much total bond interest expense will be recognized over the life of these bonds?
Amount repaid
6 semiannual payments of ($35,550*6)
($790,000 x 9%*1/2)=$ 35,550
213300
Par value at maturity
790,000
Total repaid
1,003,300
Amount borrowed
810,694
Total interest recognized over the life of the bonds
192,606
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3. Prepare an amortization table for these bonds; use the straight-line method to amortize the premium
Semiannual
period end
Cash
paid
Bond
interest
Expanses
=Carrying valuex6%
Premium
Amortization
Unamortized premium
$20694 / 6 = $3449 per period
Carrying
Value
1/1/2015
20694
810694
6/30/2015
35,550
32,428
3,122
17245
807245
12/31/2015
35,550
32,290
3,260
13796
803796
6/30/2016
35,550
32,152
3,398
10347
800347
12/31/2016
35,550
32,014
3,536
6898
796898
6/30/2017
35,550
31,876
3,674
3449
793449
12/31/2017
35,550
31,738
3,812
0
790000
Amount repaid
6 semiannual payments of ($35,550*6)
($790,000 x 9%*1/2)=$ 35,550
213300
Par value at maturity
790,000
Total repaid
1,003,300
Amount borrowed
810,694
Total interest recognized over the life of the bonds
192,606