Quatro Co. issues bonds dated January 1, 2019, with a par value of $400,000. 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 $409,850. 1. What is the amount of the premium on these bonds at issuance? 2. How much total bond interest expense will be recognized over the life of these bonds? 3. Prepare an effective interest amortization table for these bonds.

1. The amount of the premium on the issued bonds is $9,850.

2. The total bond interest expense recognized over the bonds' life = $146,150 ($156,000 - $9,850)

3. An Effective Interest Amortization Table for the bonds is as follows:

Annual Amortization Schedule  

Period    Beginning             Cash          Interest        Amortized         Ending

                Balance           Payment       Expense        Premium         Balance

1           $409,850.00     $26,000       $24,591.00   $1,409.00    $408,441.00

2.            408,441.00        26,000        24,506.46      1,493.54      406,947.46

3.           406,947.46        26,000         24,416.85       1,583.15      405,364.31

4.           405,364.51         26,000        24,321.86       1,678.14       403,686.37

5.          403,686.37         26,000        24,221.18        1,778.82      401,907.55

6.          401,907.55         26,000         24,114.45       1,885,55      400,022.00

Explanation:

Bonds Face value = $400,000

Bonds Issue price = $409,850

Bonds Premium =        $9,850

Coupon rate = 13%

Market rate = 12%

June 30 (Example for the calculations of other periods):

Cash payment = $26,000 ($400,000 x 6.5%)

Interest expense = $24,591 ($409,850 x 6%)

Premium amortized = $1,409 ($26,000 - $24,591)

Ending balance = $408,441 ($409,850 - $1,409)

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1.) $9,850

2.) $146,150

3.) see explanation

Explanation:

Amount of premium issue on the bond:

Sale price of bond - par value of bond

$409,850 - $400,000 = $9,850

2.)Total interest expense on bond over the life time of bond;

Repayment amount

Semiannual interest = (13%÷2) × $400,000

0.065 × 400,000 = $26,000

For three years :

$26,000 × 6 = $156,000

$156,000+$400,000(par value) =$556, 000

Total interest expense:

$556,000 - $409,850 = $146,150

3.)

S/annual PE- - - - unarmortized PCV of bond

1/1/19 - - - - - - - - - 9,850 - - - - - - - - - - 409,850

30/6/19 8,208 - - - - - - - - - - 408, 208

31/12/19 - - - - - - - 6566 - - - - - - - - - - - 406566

30/6/20 - - - - - - -4924 - - - - - - - - - - - 404924

31/12/20 - - - - - - 3282 - - - - - - - - - - - 403282

30/6/21 - - - - - - - 1640 - - - - - - - - - - - - 401640

31/12/21 - - - - 0 - - - - - - - - - - - - - 400000

S/annual PE = Semiannual payment end

Unarmortized P = Unarmortized premium

CV of bond = carrying value of bond

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