Quatro Co. issues bonds dated January 1, 2017, with a par value of $780,000. The
ID: 2586916 • Letter: Q
Question
Quatro Co. issues bonds dated January 1, 2017, with a par value of $780,000. 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 $799,207. 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
Explanation / Answer
1) The amount of premium on issuance of bonds = Sale value of Bond - Par Value = $779,207-$780,000 = $19,207
2) Calculation of total bond interest expense over life of bonds (Amount in $)
3) Amortized premium per period = Total premium/6 periods = $19,207/6 = $3,201 per period
Amortization table for premium (Amount in $)
Amount repaid i) Six semiannual payments of interest ($780,000*13%*1/2)*6 304,200 ii) Par Value at matuarity 780,000 Total amount repaid [(i)+(ii)] 1,084,200 Less: Amount Borrowed (799,207) Total Interest recognized over the life of bonds 284,993