Kitkat Company issued ten thousand $1,000 bonds on january 1, 2013 for $11,487,7
ID: 2448134 • Letter: K
Question
Kitkat Company issued ten thousand $1,000 bonds on january 1, 2013 for $11,487,747. The bondS carry a stated interest rate of 8%, mature in ten years, and pay interest semiannually on June 30 and December 31. The market rate of interest at the time the bonds were issued was 6%. Kitkat uses the effective interest rate for amoritizing bond discounts and premiums.
Total interest expense Kitkat would report on its income statement for the year ended December 31, 2013 realative to these bonds is closest to
A)$800.000
B)$687,603
C) $600,000
D)$689,265
Total interest paid by Kitkat on these bonds for the year ended December 31,2013 is closest to
A)$689,265
B)$800,000
C)$600,000
D)$687,603
Explanation / Answer
- Interest paid = 10,000,000 x 8% x 6/12 = $400,000
- Interest expense = Bond's opening value x 6% x 6/12
- Premium amortize = Interest paid - interest expense
- Bond's closing value = Bond's opening value - premium amortize
1. Total interest expense for the year ending 31 December, 2013 = 344,632.41 + 342,971.38 = $687,603.79. Thus, Option B.
2. Total interest paid for the year ending 31 December, 2013 = 400,000 x 2 = $800,000. Thus, Option B.
Period Bond's opening value Interest Paid Interest Expense Premium amortize Bond's closing value 0 0.00 0.00 0.00 0.00 11,487,747.00 1 11,487,747.00 400,000.00 344,632.41 55,367.59 11,432,379.41 2 11,432,379.41 400,000.00 342,971.38 57,028.62 11,375,350.79Related Questions
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