Exercise 14-9 On June 30, 2017, Mischa Auer Company issued $4,000,000 face value
ID: 2521667 • Letter: E
Question
Exercise 14-9
On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.
No.
Date
Account Titles and Explanation
Debit
Credit
June 30, 2017
December 31, 2017
June 30, 2018
December 31, 2018
(3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.)
(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?
the total interest expense if the straight-line method of amortization were used.
Exercise 14-9
On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.
Explanation / Answer
Semi-Annual Payment = $4,000,000 x 13% x 6/12 months = $260,000
Carrying Value = $4,298,975 - $2,061 = $4,296,914
The issuance of the bonds on June 30, 2017. Jun-30 Cash a/c….Dr 43,00,920 To Premium on bonds payable a/c 3,00,920 To Bonds payable a/c 40,00,000 The payment of interest and the amortization of the premium on December 31, 2017. Dec-31 Interest expense a/c….Dr 2,58,055 Premium on bonds payable a/c….Dr 1,945 To Cash a/c 2,60,000Semi-Annual Payment = $4,000,000 x 13% x 6/12 months = $260,000
Interest Expense = $4,300,920 x 12% x 6/12 months = $258,055 The payment of interest and the amortization of the premium on June 30, 2018. Jun-30 Interest expense a/c….Dr 2,57,939 Premium on bonds payable a/c….Dr 2,061 To Cash a/c 2,60,000 Carrying Value = $4,300,920 - $1,945 = $4,298,975 Interest Expense = $4,298,975 x 12% x 6/12 months = $257,939 The payment of interest and the amortization of the premium on December 31, 2018. Dec-31 Interest expense a/c….Dr 2,57,815 Premium on bonds payable a/c….Dr 2,185 To Cash a/c 2,60,000Carrying Value = $4,298,975 - $2,061 = $4,296,914
Interest Expense = $4,296,914 x 12% x 6/12 months = $257,815Related Questions
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