Question

DeWeese Corporation issues $400,000 of 8%, 5-year bonds on January 1, 2015, at 105. Assuming that the straight-line method is used to amortize the premium, what is the total amount of interest expense for 2015?

Answer 1

$28,000. Interest expense is the interest to be paid in cash less the premium amortization for the year. Cash to be paid equals 8% × $400,000 or $32,000. Total premium equals 5% of $400,000 or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts, the amortization amount is $20,000 ÷ 5 = $4,000. Thus, $32,000 – $4,000 or $28,000 equals interest expense for 2014.