Question

Franklin corporation issues $97,000, 8%, 5-year bonds on January 1, for $101,370. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is

Answer 1

$3,006

Step-by-step explanation:

Bond issue = $97,000

Interest rate = 8%

Bond value sold = $101,370

Time period 5 years

N.B The premium will have to be to be discounted from the interest expense because Franklin corporation sold the bond at a value higher than the face value i.e premium value.

Therefore;

Coupon = $97,000 × 8% × 1/2

= $3,880

Amortization of bond premium = ($101,370 - $97,000) /5 years period

= $4,370/5

= $874

Total interest expense

= $3,880 - $874

= $3,006