Franklin Corporation issues $50,000, 10%, five-year bonds on January 1 for $52,100. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is
A) $10,290
B) $2,710
C) $2,500
D) $2,290

Question

Quizplus · Accepted Answer

The bond interest expense using the straight-line method of amortization of bond premium is calculated by first determining the total premium and then spreading it evenly over the life of the bond. The total premium is $52,100 (issue price) - $50,000 (face value) = $2,100. For a five-year bond with semiannual interest payments, there are 10 periods. The premium amortization per period is $2,100 / 10 = $210. The cash interest payment is $50,000 * 10% * 1/2 = $2,500 (since interest is 10% annually, and payments are semiannual, we use half of the annual rate for each payment). The bond interest expense is the cash interest payment minus the premium amortization: $2,500 - $210 = $2,290.

Franklin Corporation Issues $50,000, 10%, Five-Year Bonds on January 1