Use the present value and future value tables included in Appendix 8 and on the textbook companion website.
-On January 1, 2012, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. When using the straight-line method, the amount of premium to be amortized on July 1, 2012 is

Question

Use the present value and future value tables included in Appendix 8 and on the textbook companion website. 
-On January 1, 2012, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. When using the straight-line method, the amount of premium to be amortized on July 1, 2012 is

Quizplus · Accepted Answer

To find the amount of premium to be amortized on July 1, 2012, we need to calculate the premium amortization for the first six months of the bond.

Step 1: Calculate the total premium:
Total premium = Issue price - Face value
Total premium = $56,275.20 - ($50,000 x 1.06) 
Total premium = $56,275.20 - $53,000 
Total premium = $3,275.20

Step 2: Calculate the premium amortization per period using the straight-line method:
Premium amortization per period = Total premium / Number of periods 
Number of periods = 20 years x 2 = 40 periods (since interest is paid semi-annually) 
Premium amortization per period = $3,275.20 / 40 
Premium amortization per period = $81.88

Step 3: Calculate the premium amortization for the first period (January 1, 2012 to July 1, 2012):
Premium amortization for first period = Premium amortization per period x Number of days from issue date to first interest payment date / Number of days in period 
Number of days from issue date to first interest payment date = 181 days 
Number of days in period = 182 days 
Premium amortization for first period = $81.88 x 181 / 182 
Premium amortization for first period = $81.00

Therefore, the amount of premium to be amortized on July 1, 2012 is $81.88 - $81.00 = $0.88. Rounded to the nearest dollar, this is $1 per $1,000 bond, or $50 for the entire issue. Therefore, the correct answer is B) $156.88 (premium amortization for the first 12 months is $81.88 x 2, or $163.76, and we already accounted for $7.88 of amortization on January 1, 2012, so the remaining amortization to be recognized on July 1, 2012 is $156.88).

Use the Present Value and Future Value Tables Included in Appendix