During 2014 and 2015, Cook Co. completed the following transactions relating to

Question

During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31.

Issued $360,000 of eight-year, 8 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?

If the bonds had sold at face value, what amount of cash would Cook Co. have received?

      

Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015.

      

Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015.

      

Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015.

2014 Mar. 1

Issued $360,000 of eight-year, 8 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.

Sept. 1

Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Dec. 31 Recognized accrued interest expense including the amortization of the discount. b. Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015. COOK CO Balance Sheet (Partial) As of December 31 2014 2015 Liabilities Bonds payable Interest payable Less: Discount on bonds payable S 360,000360,000 9,600 9,600 9,600 Carrying value of bonds payable Total liabilities 9,600 $ 369,600S369,600 c. Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015. 2014 2015 Interest expense d. Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015. 2014 2015 Interest paid

Explanation / Answer

* Using Straight Line Amortization

a-1) More, As the interest rate in the market is higher, the company had to issue the bonds at a discount

a-2) Had they been issued at face value, Cook Co. would have received the full $360,000

b.)Amortization of Discount

Total Discount of $12,000

Total Duration of 8 Years

For 2014, 10 months = 10/12 * 1/8 * 12,000 = $1,250

For 2015, 1 year = 12,000 * 1/8 = $1,500

Balance

Opening = 12,000

2014 Amortization = 1,250

2014 Balance = $10,750

2015 Amortization = 1,500

2015 Balance = $9,250

Liabilities Section

d.) Interest Payment,

In 2014, Only on September-1, interest is paid and it is 8% * 6/12 * 360,000 = $14,400

In 2015, Both March-1 and September-1, interest is paid, 8% * 360,000 = $28,800

c.)Interest Expense

In 2014, for Ten months

(1-March to December-31) = 10/12 * 8% * 360,000 = $24,000

Amortization Expense of 2014 = $1,250

In 2015, for full year, so $28,800

Amortization Expense of 2015, =$1,500

Good luck

2014 2015 Bonds Payable 360,000 360,000 Interest Payable 9,600 9,600 Discount on Bonds 10,750 9,250 Carrying Value of Bonds Payable 349,250 350,750 Total Liabilities 358,850 360,350

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