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# Bonds Payable - calculate issue price and amortize premium

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Need assistance with b, c and d. Part (a) is complete. Worksheet is attached. I am confused with premium amortization the calculations and journal entries.

Bonds Payable - calculate issue price and amortize premium. On January 1, 2009, Learned, Inc. issued \$60 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay interest semiannually each June 30 and December 31, 2028.

Required:

a. Using the present value tables, calculate the proceeds (issue price) of Learned, Inc.'s bonds on January 1, 2009, assuming that he bonds were sold to provide a market rate of return to the investor.
b. Assume instead that the proceeds were \$62,000,000. Use the horizontal model (or write journal entries) to record the payment of semiannual interest and the related premium amortization on June 30, 2009, assuming that the premium of \$2,000,000 is amortized on straight-line basis.
c. If the premium in part b were amortized using the compound interest method, would interest expense for the year ended December 31, 2009, be more than, less than, or equal to the interest expense reported using the straight-line method or premium amortization? Explain.
d. In reality, the difference between the stated interested rate and the market rate would be substantially less than 2%. The dramatic difference in this problem was designed so that you could use present value tables to answer part a. What causes the stated rate to be different from the market rate, and why is the difference likely to be much less than depicted in this problem?

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b. Assume instead that the proceeds were \$62,000,000. Use the horizontal model (or write journal entries) to record the payment of semiannual interest and the related premium amortization on June 30, 2009, assuming that the premium of \$2,000,000 is amortized on straight-line basis.

The premium is amortized over the life of the bonds. The premium amount is \$2,000,000. The interest is paid semi annually. The number of periods are 20X2=40. The amortization per period is 2,000,000/40=50,000. Since the bonds are premium bonds, the interest expense will be lower than the actual interest paid. ...

#### Solution Summary

The solution explains the calcuations related to bonds - issue price, interest payment and amortization of premium

\$2.19