On January 1, 2015, Carter Sales issued $15,000 in bonds for $15,800. They were 8-year bonds with a stated rate of 9%, and pay semiannual interest. Carter Sales uses the straight-line method to amortize the Bond Premium. Immediately after issue of the bonds, the ledger balances appeared as follows: After the first interest payment on June 30, 2015, what will be the balance in the Premium Account?

Question

On January 1, 2015, Carter Sales issued $15,000 in bonds for $15,800. They were 8-year bonds with a stated rate of 9%, and pay semiannual interest. Carter Sales uses the straight-line method to amortize the Bond Premium. Immediately after issue of the bonds, the ledger balances appeared as follows:  After the first interest payment on June 30, 2015, what will be the balance in the Premium Account?

Quizplus · Accepted Answer

The bond premium is amortized over the life of the bond using the straight-line method, which means that the same amount of premium is amortized each period. The premium on these bonds is $800 ($15,800 - $15,000). The bonds have a 8-year term, or 16 periods (2 per year). Therefore, the premium amortization is $50 per period ($800 / 16).

After the first interest payment on June 30, 2015, half a year has passed and one period of premium amortization has occurred. The Premium Account has a balance of $750 to begin with (as shown in the ledger balances), and $50 of premium has been amortized ($800 / 16). Therefore, the balance in the Premium Account after the first interest payment is a credit balance of $700 ($750 - $50). So, the correct choice is D) credit of $750.

On January 1, 2015, Carter Sales Issued $15,000 in Bonds