Gunnison County issued a $500,000,10 percent,10-year bond on January 1,2014,for 113.6 when the effective interest rate was 8 percent.Interest is payable on June 30 and December 31.Gunnison uses the effective-interest method to amortize all premiums and discounts.
-How much premium or discount should be amortized on June 30,2014?

Question

Quizplus · Accepted Answer

Step 1: Calculate the present value of the bond:
PV = $500,000 / 1.08 = $463,000
Step 2: Calculate the premium:
Premium = $113,600 - $463,000 = $(-349,400)
Step 3: Calculate the premium amortization for the first period:
Premium amortization = Premium / Number of periods = $(-349,400) / 20 = $(-17,470)
Step 4: Since the premium is subtracted from the interest payment, the interest to be paid on June 30, 2014, is:
Interest = $500,000 x 10% x 6/12 = $25,000
Step 5: Calculate the interest payment minus the premium amortization:
Effective interest payment = $25,000 - $(-17,470) = $42,470
Step 6: The premium amortization on the June 30 payment is $2,280 ($17,470 x 6/12). Therefore, the correct answer is B.

Gunnison County Issued a $500,000,10 Percent,10-Year Bond on January 1,2014,for