[jinjuujii]

On January 2, 20X3, the Lyndhurst Company, Inc., a privately held company, issued $1,000,000, 5-year, 10.00% bonds, dated January 2, 20X3. The bonds provided for semiannual interest payments to be made on June 30 and December 31 of each year. Terms of the bond indenture allowed the company to call the bonds at 102 after one year. The bonds were issued when the market interest rate was 8.00%.

Lyndhurst Company uses the effective interest method for amortizing bond discounts and premiums. The bonds are term bonds that mature on December 31, 20X7. Lyndhurst Company’s fiscal year for financial reporting purposes is December 31. The company called the bonds at 102 on June 30, 20X4.

Given:

1/1/X3 Bond Premium at $81,105

Carrying Amount of Bonds: $1,081,105

Bond Face Amount: $1,000,000

The solution had interest expense at 6/20/X1 at $43,244… I have no idea where this number came from….

Can anyone help?

FAR: 2-27-2015

[Anonymous]

interest expense = carrying amount * effective interest rate

Since the interest is paid semiannually you should divide the result from the calculation above by two.

So, (1,081,105 * 8%)/2 = 43,244 interest expense for 6/30/x3 (I think that is the date you meant to write).

The amortization of the bond premium reduces the interest expense. Don't confuse interest expense for the interest actually paid when it comes to bond with premiums/discounts. The interest paid/payable is (1,000,000 * 10%)/2 which equals 50,000. The amortization of premium for the first six months would be 50,000- 43,244 = 6,756

[jinjuujii]

CPA Chasing:

Thank you so much. My exam is tomorrow so I've been cramming this week. I understand the Amortization and Interest Expense calculation now.

Good luck on your exam – I see it is listed at FEB 2015.

FAR: 2-27-2015

[Anonymous]

Thanks! I have mine tomorrow. Good luck on yours

[Author]

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