Question

On January 1, $1,000,000, 20-year, 8% bonds, were issued for $1,070,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discounts and premiums on bonds payable, the annual amortization amount is

Answer 1

Annual Amortization expense = $76,500

Step-by-step explanation:

In the given case the interest expense for the year will be $1,000,000
`*` 8% = $80,000

Now, further the bonds are issued at a value more than face value, i.e. on premium of $1,070,000 - $1,000,000 = $70,000

Estimated life = 20 years

Therefore, per year premium amortization = $70,000/20 = $3,500 each year.

Thus annual amortization = $80,000 interest - Premium amortization $3,500

= $76,500.

In case if bonds are issued on discount then amortization is added to interest amortization as would increase the cost of company.

Final Answer

$76,500