Exercise 14-8 Presented below are three independent situations. (a) Metlock Co.

Question

Exercise 14-8

Presented below are three independent situations.

(a) Metlock Co. sold $2,060,000 of 12%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Metlock uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded$??

(b) Bonita Inc. issued $600,000 of 8%, 10-year bonds on June 30, 2017, for $462,358. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Bonita uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded??

Explanation / Answer

a) Issue price of bonds = 2060000*104/100 = 2142400

Premium on bonds payable = 2142400-2060000 = 82400

Semiannual premium amortization = 82400/20 = 4120

Semiannual interest paid = 2060000*12%*6/12 = 123600

Interest expense to be reported on july 1,2017 and december 31, 2017 = 123600-4120 = $119480

b) Interest expense recorded on oct 31,2017 = 462358*12%*4/12 = $18494

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