On January 1, 2012, Young Inc. purchased $50,000 of Montana Corporation 14 percent bonds for $53,000. Interest is payable semiannually. If Young desires a 12 percent rate of return, how much premium should be amortized on June 30, 2012, using the effective-interest method?

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Quizplus · Accepted Answer

The effective interest method calculates interest based on the carrying amount of the bond. The carrying amount is $53,000, and the desired rate of return is 12% annually, or 6% semiannually. The interest income is $53,000 * 6% = $3,180. The actual interest received is $50,000 * 7% = $3,500. The premium amortized is the difference: $3,500 - $3,180 = $320.