Amortization of the bond premium


Maui Blends, Inc. generates and sells organically grown coffee. On July 1, 2010, Maui Blends, Inc. issued $3,000,000 of 15-year, 12% bonds at an efficient interest rate of 10%, receiving cash of $3, 461,181. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions:

1) Journalize the entry to record the amount of cash proceeds from sale of the bonds.

2) Journalize the entries to record the given:

a) The first semiannual interest payment on December 31, 2010, and the amortization of the bond premium, by using the straight-line method.

b) The interest payment on June 30, 2011 and the amortization of the bond premium, by using the straight-line method.

3) Find out the total interest expense for 2010.

4) Will the bond proceeds always be more than the face amount of the bonds if the contract rate is more than the market rate of interest?

5) Calculate the price of $ 3,461,181 received for the bonds by using the tables of present value at the end of the text.

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Finance Basics: Amortization of the bond premium
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