Kid Karate issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,000. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually.

Question

Quizplus · Accepted Answer

The effective interest method of amortization requires that the premium be amortized over the life of the bonds.

First, we need to calculate the annual interest payment on the bonds. This is calculated as:

$100,000 * 6% = $6,000

Next, we need to calculate the amount of premium that needs to be amortized each year. This is calculated as:

($107,000 - $100,000) / 10 = $700

Since interest is paid annually, the premium amortization for the first year will be $700 - $50 (the difference between the annual interest payment and the amount of premium amortization). This gives us:

$650

Therefore, the correct answer is D: Amortization of the premium for the first interest period will be $650.

Kid Karate Issued $100,000 of 6%, 10 Year Bonds When