Knollwood Corporation issued $300,000 of 30-year, 8 percent bonds at 106 on one of its semiannual interest dates. The straight-line method of amortization is to be used. What is the total interest cost of the bonds?

Question

Quizplus · Accepted Answer

The total amount received from the issuance of the bonds is $318,000 ($300,000 x 106%). The bonds are to be amortized over 60 semiannual periods (30 years x 2 semiannual periods per year). The premium of $18,000 ($318,000 - $300,000) is to be amortized evenly over the 60 semiannual periods, resulting in an annual amortization of $600 ($18,000 ÷ 30 years). The first year's interest is calculated by multiplying the carrying value of the bond ($318,000 - $600) by the interest rate (8%), resulting in an interest cost of $25,440. The premium amortization of $600 is subtracted from the interest cost to arrive at the total interest cost for the first year of $24,840. This process is repeated for each of the 60 semiannual periods, resulting in a total interest cost of $702,000 ($24,840 x 60). Therefore, the correct answer is B.

Knollwood Corporation Issued $300,000 of 30-Year, 8 Percent Bonds at 106