DeWeese Corporation issues $400,000 of 8%, 5-year bonds on January 1, 2015, at 105. Assuming that the straight-line method is used to amortize the premium, what is the total amount of interest expense for 2015?
$28,000. Interest expense is the interest to be paid in cash less the premium amortization for the year. Cash to be paid equals 8% × $400,000 or $32,000. Total premium equals 5% of $400,000 or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts, the amortization amount is $20,000 ÷ 5 = $4,000. Thus, $32,000 – $4,000 or $28,000 equals interest expense for 2014.
To calculate the total amount of interest expense for 2015, we need to determine two key components: the premium on the bonds and the annual interest payment.
First, let's calculate the premium on the bonds. The bonds were issued at 105, which means they were sold at a premium of 5% (105% - 100%).
Premium = Bond Face Value * Premium Rate
Premium = $400,000 * 5% = $20,000
Next, let's determine the annual interest payment. The bonds have a face value of $400,000 and an interest rate of 8%.
Annual Interest Payment = Bond Face Value * Interest Rate
Annual Interest Payment = $400,000 * 8% = $32,000
Since the straight-line method is used to amortize the premium, the amortization of the premium will be spread evenly over the life of the bonds (5 years).
Amortization of Premium = Premium / Number of Years
Amortization of Premium = $20,000 / 5 = $4,000
The interest expense for 2015 will be the sum of the annual interest payment and the amortization of the premium.
Total Interest Expense for 2015 = Annual Interest Payment + Amortization of Premium
Total Interest Expense for 2015 = $32,000 + $4,000 = $36,000
Therefore, the total amount of interest expense for 2015 is $36,000.
To determine the total amount of interest expense for 2015, we need to calculate the premium amortization for the bonds.
First, let's calculate the premium amount. The bonds were issued at 105, which means they were sold at a premium of 5% (105% - 100%).
Premium amount = Premium rate * Bond face value
= 5% * $400,000
= $20,000
Now, we need to amortize this premium over the life of the bonds using the straight-line method. Since the bonds have a 5-year term, the annual premium amortization will be $20,000 / 5 = $4,000.
The interest expense for the first year will be the sum of the stated interest rate and the premium amortization.
Interest expense for 2015 = Stated interest rate + Premium amortization
= 8% + $4,000
= 8% + 0.08 * $400,000
Therefore, the total amount of interest expense for 2015 is $32,000.