To calculate the amount of premium on these bonds at issuance, we need to subtract the par value from the selling price: $717,237 - $700,000 = $17,237.
To find the total bond interest expense over the life of these bonds, we first need to calculate the semiannual interest payment. The annual contract rate is 13%, so the semiannual contract rate is 6.5% (13% divided by 2).
The semiannual interest payment can be calculated as: Semiannual interest payment = Par value x Semiannual contract rate = $700,000 x 6.5% = $45,500.
Since interest is paid semiannually, there will be a total of 6 interest payments over the life of the bond (3 years x 2 semiannual periods = 6).
Therefore, the total bond interest expense will be: $45,500 x 6 = $273,000.
To prepare an effective interest amortization table for these bonds, we need to calculate the interest expense and the amortization of the premium for each semiannual period.
Here’s how the amortization table would look like:
Period | Carrying Value | Semiannual Interest Expense | Amortization of Premium | Premium Balance
1 (Jan 1, 2021) | $717,237 | $23,302 | $22,187 | $17,237 - $22,187 = ($4,950)
2 (June 30, 2021) | $712,287 | $23,187 | $22,187 | ($4,950) - $22,187 = ($27,137)
3 (Dec 31, 2021) | $685,150 | $22,315 | $22,187 | ($27,137) - $22,187 = ($49,324)
4 (June 30, 2022) | $635,826 | $20,731 | $22,187 | ($49,324) - $22,187 = ($71,511)
5 (Dec 31, 2022) | $564,315 | $18,391 | $22,187 | ($71,511) - $22,187 = ($93,698)
6 (June 30, 2023) | $470,617 | $15,350 | $22,187 | ($93,698) - $22,187 = ($115,885)
Note: The carrying value is calculated by subtracting the total amortization of premium from the initial carrying value (selling price), and the premium balance is the difference between the amortization of premium and the carrying value.
This table shows the amortization of the premium over the life of the bond and the corresponding interest expense for each period.
Quatro Company issues bonds dated January 1, 2021, with a par value of $700,000. The bonds’ annual contract rate is 13%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $717,237. What is the amount of the premium on these bonds at issuance? How much total bond interest expense will be recognized over the life of these bonds? Prepare an effective interest amortization table for these bonds
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