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

Question

Exercise 14-8 Presented below are three independent situations. (a) Crane Co. sold $2,080,000 of 12%, 10-year bonds at 105 on January 1, 2017, The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Crane 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. (Ronswer to O decimal places, e.g. 38,548.) Interest expense to be recorded (b) Cheyenne Inc. issued $590,000 of 9%, 10-year bonds on June 30, 2017, for $488,488. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Cheyenne 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 o decimal places, e.g. 38,548.) Interest expense to be recorded g

Explanation / Answer

Answer to Part a.

Interest Expense to be recorded = Interest Paid – Premium on Bonds Payable amortized
Premium on Bonds Payable = $2,080,000 * 0.05
Premium on Bonds Payable = $104,000

Premium on Bonds Payable to be amortized semi-annually = 104,000 * 1/10 * 6/12
Premium on Bonds Payable to be amortized semi-annually = $5,200

Interest Paid = $2,080,000 * 12% * 6/12
Interest Paid = $124,800

Interest Expense to be recorded = $124,800 - $5,200
Interest Expense to be recorded = $119,600

Answer to Part b.

Interest Expense to be recorded = Carrying Value * Effective Interest Rate * Period
Carrying Value = $488,488
Effective Interest Rate = 12%
Period = 4 Months

Interest Expense to be recorded = $488,488 * 12% * 4/12
Interest Expense to be recorded = $19,539.52
or Interest Expense to be recorded = $19,540

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