Assume that a bond is issued with the following characteristics: Date of bonds:

Question

Assume that a bond is issued with the following characteristics:
Date of bonds: Issued January 1, 2008; maturity date: January 1, 2013; face value: $200,000; face interest rate: 10 percent paid semiannually (5 percent per period); market interest rate: 8 percent (4 percent per semiannual period); issue price: $216,222; bond premium is amortized using the straight-line method of amortization. What is the amount of bond premium amortization for the June 30, 2008, adjusting entry?
What is the carrying value of the bonds on June 30, 2009?

Explanation / Answer

What is the amount of bond premium amortization for the June 30, 2008, adjusting entry? The initial amount of the premium is 16222. This is a semiannual interest, five-year bond, so the amount of the adjusting entry is determined this way: 16222/5/2 = 1622.20 The entry would be as follows: Premium on bonds payable (Dr.) 1622.20 Interest expense (Cr.) 1622.20 What is the carrying value of the bonds on June 30, 2009? By June 30, 2009, we will have made three of these entries, making the total amount amortized 4866.60. The unamortized portion of the premium is 11355.40 (16222-4866.60). Thus the carrying amount is calculated as follows: Bonds payable 200000 +Unamortized premium 11355.40 Carrying value: 211355.40

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