Trendy Company issued $600,000 of 8%, 5-year bonds at 105 on January 1, 2021.Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on December 31, 2021?

Question

Quizplus · Accepted Answer

The effective interest rate on the bonds is (105-100)/100/5 = 1%.
Annual interest payment is $600,000 x 8% = $48,000.
Bond interest expense = $600,000 x 1% = $6,000 (for the first year).
Therefore, the amortization of the bond premium is ($48,000 - $6,000) = $42,000.

Trendy Company Issued $600,000 of 8%, 5-Year Bonds at 105