Math Problem Statement
Metlock Electronics Ltd. issued $690,000 of 15-year, 6.0% bonds on January 1, 2025, when the market interest rate was 5.0%. The cash received at the issuance of the bond was $762,209.51. Interest is payable semi-annually on July 1 and January 1. Metlock has a December 31 year end.
Prepare a bond amortization schedule for the first four interest periods, using the effective-interest method. (Round answers to 2 decimal places, eg. 15.75.)
Solution
To prepare a bond amortization schedule using the effective interest method, we need to calculate the following for each period:
- Interest Payment: This is calculated based on the stated rate of the bond.
- Interest Expense: This is calculated using the carrying amount of the bond and the market rate at the time of issuance.
- Amortization of the Premium: The difference between the interest expense and the interest payment.
Given:
- Face Value of the Bond: $690,000
- Stated Interest Rate: 6.0% per year (which means 3.0% per semi-annual period)
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Math Problem Analysis
Mathematical Concepts
Finance Mathematics
Bond Amortization
Effective-Interest Method
Time Value of Money
Formulas
Interest Payment = Face Value × Stated Rate ÷ 2
Interest Expense = Carrying Amount × Market Rate ÷ 2
Premium Amortization = Interest Expense - Interest Payment
Theorems
Effective Interest Rate Method
Amortization of Bond Premium
Suitable Grade Level
College or University Level (Finance/Accounting Courses)
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