On January 1, Year 1, Hanover Corporation issued bonds with a face value of $300,000 and a 10-year term to maturity. On that date, the market interest rate was 7%. The bonds were issued at 103.5. Interest in the amount of $22,495 is payable in cash on December 31 of each year. Hanover Corporation uses the effective interest method to amortize discounts and premiums on bonds. (Round all intermediate calculations to two decimal places and final answers to whole dollars.)Required:a) Determine the amount of the premium on the bonds when they were issued.b) (1) Determine the amount of interest expense for Year 1.b) (2) Determine the amount of premium amortization for Year 1.c) Determine the carrying value of the bonds on December 31, Year 1.d) Determine the amount of interest expense for Year

Question

2.

What will be an ideal response?

Answer 1

a) $10,500
b) (1) $21,735
b) (2) $760 
c) $309,740 
d) $21,682
a) Issue price = Face value of $300,000 × 103.5% = $310,500 
Premium = Issue price of $310,500 - Face value of $300,000 = $10,500
b) (1) Year 1 Interest expense = Carrying value at beginning of year of $310,500 × Market rate of 7% = $21,735
b) (2) Year 1 Amortization of premium = Interest payment of $22,495 (given) - Interest expense of $21,735 = $760
c) Carrying value at end of Year 1 = Carrying value at beginning of year of $310,500 - Amortization of premium of $760 = $309,740 
d) Year 2 Interest expense = Carrying value at end of Year 1 of $309,740 × Market rate of 7% = $21,682 (rounded)