On January 1, 2011, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2011, when using the straight-line method is

Question

Quizplus · Accepted Answer

The premium amortization can be calculated using the straight-line method, which allocates an equal amount of premium to each interest period.

First, calculate the total premium by subtracting the face value of the bond ($50,000) from the proceeds of the bond issue ($56,275.20):

Premium = $56,275.20 - $50,000 = $6,275.20

Next, calculate the annual premium amortization by dividing the total premium by the number of years in the bond term:

Annual premium amortization = $6,275.20 / 20 years = $313.76 per year

Finally, since the interest payment dates are on January 1 and July 1, the premium amortization for the first interest period (January 1, 2011 to July 1, 2011) is half of the annual premium amortization:

Premium amortization for first interest period = $313.76 / 2 = $156.88

Therefore, the answer is B) $156.88.

On January 1, 2011, $50,000 of 20-Year, 6 Percent Debentures