Question

On January 1, 2008, 50,000 of 20-year, 6 percent debentures were issued for 56,275.20. Interest payment dates on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2008, when using the straight-line method is?

Answer 1

The amount of premium on the 20-year, 6 percent debentures to be amortized on July 1, 2008, using the straight-line method is $78.44.

Step-by-step explanation:

To determine the amount of premium to be amortized on July 1, 2008, using the straight-line method, we must first understand what the premium on bonds payable is. The premium represents the difference between the amount the bonds were issued for and their face value. Since the 20-year, 6 percent debentures were issued for $56,275.20, and assuming the face value is $50,000, the premium is $6,275.20 ($56,275.20 - $50,000). To amortize this premium over the life of the bonds using the straight-line method, you divide the total premium by the number of interest payments over the bond's term.

For 20-year debentures with semi-annual interest payments, there are 40 total interest payments (20 years x 2 payments per year). Hence, the annual amortization is $6,275.20 / 40 = $156.88. Since interest payments are made semi-annually, we halve the annual amortization to find the amount to be amortized on July 1, 2008: $156.88 / 2 = $78.44.