Quatro Co. issues bonds dated January 1, 2018, with a par value of $880,000. The

Question

Quatro Co. issues bonds dated January 1, 2018, with a par value of $880,000. 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 $901,670.

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?

Total Bond Interest Expense Over Life of Bonds: Amount repaid: 6 payments of Par value at maturity 880,000 Total repaid Less amount borrowed Total bond interest expense 880,000 $ 880,000

Explanation / Answer

1) Premium on bonds payable = 901670-880000 = $21670

2) Total bond interest expense = (880000*13%*3)-21670 = $321530

3. Prepare an amortization table for these bonds; use the straight-line method to amortize the premium.

Year Bond interest expense Interest paid Premium amortization Carrying value Issue date 901670 June 30, 2018 53588 57200 3612 898058 Dec 31,2018 53588 57200 3612 894446 June 30,2019 53588 57200 3612 890834 Dec 31,2019 53588 57200 3612 887222 June 30,2020 53588 57200 3612 883610 Dec 31,2020 53590 57200 3610 880000 Total 321530

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