A is corrent. Under the effective interest method, interest expense is computed as follows: | CA of | | Yield | | Time | | Interest | | bonds | × | rate | × | period | = | expense | | $105,000 | × | 6% | × | 12/12 | = | $6,300 |
The cash interest payable is
computed as follows: | FV of | | Stated | | Time | | Cash | | bonds | × | rate | × | period | = | interest | | $100,000 | × | 7% | × | 12/12 | = | $7,000 |
The
bond premium amortization is the difference between these two amounts ($7,000 −
$6,300 = $700). Therefore, the unamortized premium at 6/30/Y2 is $4,300 ($5,000
− $700). B is incorrect. Under the effective interest method, interest expense is computed as follows: | CA of | | Yield | | Time | | Interest | | bonds | × | rate | × | period | = | expense | | $105,000 | × | 6% | × | 12/12 | = | $6,300 |
The cash interest payable is
computed as follows: | FV of | | Stated | | Time | | Cash | | bonds | × | rate | × | period | = | interest | | $100,000 | × | 7% | × | 12/12 | = | $7,000 |
The
bond premium amortization is the difference between these two amounts ($7,000 −
$6,300 = $700). Therefore, the unamortized premium at 6/30/Y2 is $4,300 ($5,000
− $700). C is incorrect. Under the effective interest method, interest expense is computed as follows: | CA of | | Yield | | Time | | Interest | | bonds | × | rate | × | period | = | expense | | $105,000 | × | 6% | × | 12/12 | = | $6,300 |
The cash interest payable is
computed as follows: | FV of | | Stated | | Time | | Cash | | bonds | × | rate | × | period | = | interest | | $100,000 | × | 7% | × | 12/12 | = | $7,000 |
The
bond premium amortization is the difference between these two amounts ($7,000 −
$6,300 = $700). Therefore, the unamortized premium at 6/30/Y2 is $4,300 ($5,000
− $700). D is incorrect. Under the effective interest method, interest expense is computed as follows: | CA of | | Yield | | Time | | Interest | | bonds | × | rate | × | period | = | expense | | $105,000 | × | 6% | × | 12/12 | = | $6,300 |
The cash interest payable is
computed as follows: | FV of | | Stated | | Time | | Cash | | bonds | × | rate | × | period | = | interest | | $100,000 | × | 7% | × | 12/12 | = | $7,000 |
The
bond premium amortization is the difference between these two amounts ($7,000 −
$6,300 = $700). Therefore, the unamortized premium at 6/30/Y2 is $4,300 ($5,000
− $700). |
