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