Question

On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000, which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%, resulting in bond premium of $540,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2012, Solis's adjusted unamortized bond premium should be

a. $540,000.
b. $503,200.
c. $486,000.
d. $406,000.

Answer 1

To calculate the adjusted unamortized bond premium, we use the effective-interest method of amortization. The adjusted unamortized bond premium at December 31, 2012, would be $503,200.

Step-by-step explanation:

To calculate the adjusted unamortized bond premium, we need to use the effective-interest method of amortization. Under this method, the bond premium is amortized over the life of the bond based on the effective interest rate. The formula to calculate the interest expense is: Bond Carrying Value x Effective Interest Rate.

In this case, the bond was issued for $4,540,000 and the bond premium is $540,000. The effective interest rate is 8%. Therefore, the interest expense for the first year would be $4,540,000 x 8% = $363,200. The amount of premium to be amortized for the year is the difference between the interest expense and the interest paid, which is $363,200 - $400,000 = $-36,800. Since it is a premium, we subtract it from the unamortized premium from the previous year. Therefore, the adjusted unamortized bond premium at December 31, 2012, would be $540,000 - $36,800 = $503,200.