A corporation issues $88,000, 8%, 5-year bonds on January 1, for $91,960. Intere

Question

A corporation issues $88,000, 8%, 5-year bonds on January 1, for $91,960. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond premium, determine the amount of bond interest expense to be recognized on July 1. A corporation issues $88,000, 8%, 5-year bonds on January 1, for $91,960. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond premium, determine the amount of bond interest expense to be recognized on July 1.

Explanation / Answer

Premium on Bond Payable = Issue price of bond - Par value of bond = $91960 - $88000 = $3960 Bond premium amortization per semi annual period (using straight line method) = Bond premium / No.of semi annual periods = $3960 / 10 = $396 Bond Interest Expense to be recognised on July 1 = Semi annual coupon payment - Bond premium amortization Bond Interest Expense to be recognised on July 1 = ($88000*4%) - $396 = $3124

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