Lake Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2015. The bonds had a face value of $200,000, pay interest annually on January 1, and have a call price of 101. Lake uses the straight-line method of amortization. What is the amount of interest Lake must pay the bondholders on January 1, 2016?

Question

Quizplus · Accepted Answer

The annual interest payment is calculated as the face value of the bond multiplied by the interest rate. So, the annual interest payment is $200,000 x 6% = $12,000.

Since Lake uses the straight-line method of amortization, the premium of $12,000 ($200,000 - $188,000) must be amortized over the life of the bond.

The annual amortization of the premium is calculated as the premium divided by the number of years until the bond matures. In this case, the premium is $12,000 and the bond matures in 10 years, so the annual amortization is $1,200.

Therefore, the amount of interest Lake must pay the bondholders on January 1, 2016 is the annual interest payment of $12,000 minus the annual amortization of the premium of $1,200, which equals $10,800.

So, the answer is B) $12,000.

Lake Company Received Proceeds of $188,000 on 10-Year, 6% Bonds