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aimtobeacpa
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Joined: 10 Dec 2009
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Posted: 29 Oct 2010 at 13:08 \| IP Logged

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to
yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On
June 30, 1992, the carrying amount of the outstanding bond was $105,000. What amount of unamortized
premium on bond should Webb report in its June 30, 1993, balance sheet?
a. $1,050
b. $3,950
c. $4,300
d. $4,500
CPA-00485 Explanation
Choice "c" is correct. The unamortized premium is amortized over the life of the bond using the 6% yield
rate. The following chart shows the unamortized premiums:
Interest Interest Premium Unamortized
Date Expense Paid Amortized Premium
6-30-92 $5,000
6-30-93 $6,300 $7,000 $700 4,300
Note: $6,300 =
Carrying amount of note at beginning of period $105,000
x 6% effective interest rate 6%
Interest expense for period $6,300
APB 21 para. 16
Note: If interest had been paid and premium amortized every 6 months, the unamortized premium would
have been approximately $4,290.

(here we will have to divide by 2 i.e use 3.5% and 3% yield...but it doesnt come as 4290??)plz suggest

Choice "a" is incorrect. The unamortized premium is amortized over the life of the bond using the 6%
yield rate.
Choice "b" is incorrect. The unamortized premium is amortized over the life of the bond using the 6%
yield rate.
Choice "d" is incorrect. The effective interest, not straight-line, method is being used.

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AUD-75
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Posted: 29 Oct 2010 at 13:28 \| IP Logged

105,000*6%=6300 yield

100,000*7%=7000 actual

7000-6300=700

premium of 5000-700=4300

I didn't see where the problem stated interest was paid every 6 months, just that it was sold to yield 6% annual using the effective interest rate

aimtobeacpa
Major Contributor

Joined: 10 Dec 2009
Online Status: Offline
Posts: 657

Posted: 29 Oct 2010 at 15:21 \| IP Logged

hey not in question..

there is a note saying which i have highlighted,

if int is paid in 6 months, wht will be the answer?

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BEC-74,82(lost credit),78
FAR-67,80
AUD-75
REG-68,72,79

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