On March 1, 2017, Taft Corporation issues 10-year bonds, dated January 1, 2017, at 102% of a par value of $800,000 (premium). These bonds have an annual interest rate of 6 percent, payable semiannually on January 1 and July 1.
Its March 1 entry would be:
| Cash [($800,000 × 1.02) + ($800,000 × .06 × 2/12)] |
824,000 |
|
| Bonds Payable |
|
800,000 |
| Premium on Bonds Payable ($800,000 × .02) |
|
16,000 |
| Interest Expense |
|
8,000
|
Taft would amortize the premium from the date of sale (March 1, 2017), not from the date of the bonds (January 1, 2017). As a result, the premium amortization at July 1, 2017, is $542.37 [($16,000÷$118)×4].
My question is regarding the final sentence which discusses the premium amortization at july 1. Im not sure how the formula was created to find the amount at 543.37. More specifically, I dont know how the book came up with the number $118 in the formula. Some clarification would be nice.