Exercise 14-9 On June 30, 2017, Wildhorse Company issued $4,700,000 face value o
ID: 2525342 • Letter: E
Question
Exercise 14-9
On June 30, 2017, Wildhorse Company issued $4,700,000 face value of 13%, 20-year bonds at $5,053,579, a yield of 12%. Wildhorse 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
Open Show Work
Exercise 14-9
On June 30, 2017, Wildhorse Company issued $4,700,000 face value of 13%, 20-year bonds at $5,053,579, a yield of 12%. Wildhorse uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.
Explanation / Answer
a) No. Date Account Titles and Explanation Debit Credit 1) June 30, 2017 Cash $5,053,579.00 Premium on Bonds Payable $353,579.00 Bonds payable $4,700,000.00 2) December 31, 2017 Interest Expenses ($5,053,579 X 12%/12 mo X 6 mo $303,214.74 Premium on Bonds Payable (difference) $2,285.26 Cash $4,700,000 X 13%/12 X 6 months $305,500.00 3) June 30, 2018 Interest Expenses ($5,053,579 - $2285.26X 12%/12 mo X 6 mo $303,077.62 Premium on Bonds Payable (difference) $2,422.38 Cash $4,700,000 X 13%/12 X 6 months $305,500.00 4) December 31, 2018 Interest Expenses ($5,053,579 - $2285.26 -$2422.38) X 12%/12 mo X 6 mo $302,932.28 Premium on Bonds Payable (difference) $2,567.72 Cash $4,700,000 X 13%/12 X 6 months $305,500.00 b) Wildhorse Company Balance Sheet December 31, 2018 Long-term Liabilities: Bonds payable, 13% (due on June 30, 2028) $4,700,000.00 Premium on Bonds Payable $346,303.65 Book value of bonds payable $5,046,303.65 c) Provide the answers to the following questions. (1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.) Interest expense reported for 2018 $303,077.62 + $302,932.28 $606,009.91 (2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2018 will be greater than the amount that would be reported if the straight-line method of amortization were used. (3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.) Total cost of borrowing over the life of the bond Total interest to be paid for the bond ($4,700,000 X 13% X 20) $12,220,000.00 Principal due in 2028 $4,700,000.00 Total cash outlays for the bond $16,920,000.00 Cash received at issuance of the bond -$5,053,579.00 Total cost of borrowing over the life of the bond $11,866,421.00 (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 bond interest expense for the life of the bond will be the same as the total interest expense if the straight-line method of amortization were used.
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