The Amazing Widget Company issues $500,000 of 6%, 10-year bonds at 103 on March 31, 2014. The bond pays interest on March 31 and September 30. Assume that the company uses the straight-line method for amortization. Calculate the net balance that will be reported for the bonds on the balance sheet on September 30, 2014.

Question

Quizplus · Accepted Answer

The bond was issued for $500,000 at 103, which means the company received $515,000 [$500,000 x 103%]. The bond has a 10-year term, so there are 20 semi-annual periods [$500,000 x 6% / 2].

Using the straight-line method, the premium of $15,000 ($515,000 - $500,000) will be amortized evenly over 20 periods, resulting in an annual amortization of $750 ($15,000 / 20).

Since the bond pays interest on March 31 and September 30, the company will have earned half a year's interest ($500,000 x 6% x 1/2) or $15,000 by September 30.

Therefore, the net balance reported for the bonds on September 30, 2014 will be: 
Bond principal - accumulated amortization + accrued interest:
$500,000 - ($750 x 1) + $15,000 = $514,250

The Amazing Widget Company Issues $500,000 of 6%, 10-Year Bonds