Question

On January 1, Hannibal Company sold $500,000, 5-year, 6% bonds for $465,000. Interest is to be 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

$37,000

Step-by-step explanation:

Bonds issued at a discount:

When bonds are issued at a discount,

then interest expense/annual amortization amount = cash interest paid + amortization of discount

Bond Issued t a Premium

When bonds are issued at a premium,

then annual Amortization = interest expense- amortization of premium

Step One: Determine if the Bonds were issued at a Premium or at a Discount

$500,000, 5-year, 6% bonds, were sold for $465,000. The bonds were issued at a discount.

The formula to use will be as follows:

Annual Amortization= Interest expense + Amortized Discount

Step Two: Calculate the Interest and the amortized discount

Interest paid in cash = Face value ×the contractual interest rate

= $500,000 x 6% = $30,000 per year

Straight-line amortization per year = ($500,000 - $465,000)/5 = $7,000 per year

Therefore:

The annual amortization amount based on the formula since the bonds were issued at a discount

= $30,000 + 7,000 = $37,000