Austin Corporation sold its $1,000,000, 7%, ten-year bonds to the public on January 1, 20X1. The bonds pay interest annually, beginning on December 31, 20X1. Austin received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were sold was 5%
(a) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "effective-interest" method is used. $_______________
(b) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "straight-line" method is used. $_______________
(c) Which method above is theoretically the better to use for amortizing a bond premium ?

Question

Austin Corporation sold its $1,000,000, 7%, ten-year bonds to the public on January 1, 20X1. The bonds pay interest annually, beginning on December 31, 20X1. Austin received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were sold was 5% 
(a) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "effective-interest" method is used. $_______________ 
(b) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "straight-line" method is used. $_______________ 
(c) Which method above is theoretically the better to use for amortizing a bond premium ?

Quizplus · Accepted Answer

The Answer of Austin Corporation sold its $1,000,000, 7%, ten-year bonds to the public on January 1, 20X1. The bonds pay interest annually, beginning on December 31, 20X1. Austin received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were sold was 5% 
(a) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "effective-interest" method is used. $_______________ 
(b) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "straight-line" method is used. $_______________ 
(c) Which method above is theoretically the better to use for amortizing a bond premium ?

Austin Corporation Sold Its $1,000,000, 7%, Ten-Year Bonds to the Public