Park Enterprises issued bonds with a face value of $500,000, a stated rate of interest of 7%, and a 5-year term to maturity. The proceeds from the issuance were $508,000. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the amount of interest expense for the first year would be $31,600.
Answer the following statement true (T) or false (F)
False
Premium = Issue price of $508,000 ? Face value of $500,000 = $8,000
Annual amortization of premium = $8,000 ÷ 5 years = $1,600
Cash payment for interest = Face value of $500,000 × Stated rate of 7% = $35,000
Interest expense = Cash payment of $35,000 ? Premium amortization of $1,600 = $33,400
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