- A company issued $500,000 of 8% bonds at 104 on January 1, Year 1. The bonds mature in 10 years and pay interest semiannually. Using the straight-line method, what is the carrying amount of the bonds on December 31, Year 3?
Answer: $514,000
The bonds were issued at 104, so the issue price was $520,000 ($500,000 × 1.04). The premium is $20,000 ($520,000 - $500,000). Over 10 years (20 semiannual periods), the premium amortization per period is $1,000 ($20,000 ÷ 20). After 3 years (6 periods), total amortization is $6,000. Carrying amount = $520,000 - $6,000 = $514,000. Choice A incorrectly uses annual amortization ($2,000 × 3 = $6,000 subtracted incorrectly). Choice B uses 4 periods instead of 6. Choice D uses 8 periods instead of 6.
- On July 1, Year 1, XYZ Corp. issued $300,000 of 6% bonds at 96, maturing in 8 years with semiannual interest payments. The company uses straight-line amortization. What amount of interest expense will be recorded for the interest payment on January 1, Year 2?
Answer: $9,750
The bonds were issued at a discount of $12,000 ($300,000 - $288,000). Over 8 years (16 semiannual periods), discount amortization per period is $750 ($12,000 ÷ 16). Interest expense = cash interest + discount amortization = ($300,000 × 6% × 6/12) + $750 = $9,000 + $750 = $9,750. Choice A is only the cash interest payment. Choice B incorrectly calculates amortization over 8 periods instead of 16. Choice D subtracts the amortization instead of adding it.
- A corporation issued $800,000 of 10-year, 5% bonds at 102.5 on April 1, Year 1. Interest is paid annually on March 31. Using straight-line amortization, what is the bond premium balance remaining on March 31, Year 4?
Answer: $14,000
Initial premium = $800,000 × 2.5% = $20,000. Annual premium amortization = $20,000 ÷ 10 years = $2,000. After 3 years (from April 1, Year 1 to March 31, Year 4), total amortization = $2,000 × 3 = $6,000. Remaining premium = $20,000 - $6,000 = $14,000. Choice A is the original premium amount. Choice C assumes 4 years of amortization. Choice D assumes 2 years of amortization.
- A company issued $750,000 of bonds at 103.2 on October 1, Year 1, maturing on September 30, Year 6. Interest of 6% is paid annually on September 30. The company's fiscal year ends on December 31. Using straight-line amortization, what amount should be reported as premium on bonds payable on December 31, Year 3?
Answer: $14,400
Premium = $750,000 × 3.2% = $24,000. Annual amortization = $24,000 ÷ 5 years = $4,800. By December 31, Year 3, two full annual amortization periods have occurred (September 30, Year 2 and September 30, Year 3). Total amortization = $4,800 × 2 = $9,600. Remaining premium = $24,000 - $9,600 = $14,400. Choice A is the original premium. Choice C assumes 1.5 years of amortization. Choice D assumes 2.5 years of amortization.
