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# Bond Amortization

Company issued \$1,500,000 of its 10%, 20-year bonds on their authorized date of 6/1/05. The bonds were issued at a price of \$1,796,893 to produce an effective yield of 8%. Interest payments are made twice per year, 6/1 and 12/1, with discounts and premiums being amortized using the effective interest method.

Compute the
1) balance of the premium account at 6/1/06
2) amount of interest expense reported FYE 12/31/06
3) carry value of the bond at 12/31/06

CLUE must MATCH:Carry value of the bonds at 12/1/07 is \$1,779,972

#### Solution Preview

In effective interest method, the interest expense is based on the effective interest rate and the amount raised. The interest expense would be 8% on 1,796,893 in a year and half of it for each six months. The premium or discount is the difference between the face value and the amount raised. We can construct a table as shown below

Date Opening Book Value Interest Premium Book Value
12/1/2005 \$1,796,893.00 \$71,875.72(\$3,124.28) \$1,793,768.72
12/31/2005\$1,793,768.72 \$11,958.46(\$541.54) \$1,793,227.18
6/1/2006 \$1,793,227.18 \$59,774.24 ...

#### Solution Summary

The solution explains how to prepare a bond amortization table for bonds issued at a premium

\$2.19