A bond premium must be amortized using the interest method or the straight-line method if the results are not materially different.

A bond premium must be amortized using the interest method or the straight-line method if the results are not materially different. To use the straight-line method, the amount of time the bonds will be outstanding must be known. Since this time period is not given, the interest method must be used. Under the interest method, interest expense is computed as follows:

BV of bonds × Yield rate × Time period = Interest expense
$103,288 × 10% × 6/12 = $5,164

The interest payable at 12/31/Y1 is $6,000 ($100,000 × 12% × 6/12), so the 12/31/Y1 journal entry is

Interest expense 5,164
Premium on BP 836
Interest payable 6,000

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