Presented below are three independent situations. (a) Novak Co. sold $1,950,000
ID: 2531224 • Letter: P
Question
Presented below are three independent situations.
(a) Novak Co. sold $1,950,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Novak 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. (Round answer to 0 decimal places, e.g. 38,548.)
(b) Splish Inc. issued $640,000 of 9%, 10-year bonds on June 30, 2017, for $600,121. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Splish 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 0 decimal places, e.g. 38,548.)
Explanation / Answer
a) Premium on Bonds = ($1,950,000*1.04) - $1,950,000
= 2,028,000 - $1,950,000 = $78,000
No. of semiannual periods = 10 yrs*2 periods = 20 periods
Amortization per semiannual period = Premium/No. of semiannual periods
= $78,000/20 periods = $3,900
Interest Expense to be paid in cash = Face Value of Bonds*Interest Rate
= $1,950,000*10% = $195,000
Interest Expense to be recorded = Interest paid in cash - Premium Amortization
= $195,000 - $3,900 = $191,100
Therefore, interest expense to be recorded on July 1, 2017, and December 31 is $191,100.
b) Yield Rate for four months (from july to october) = 10%*4/12 = 3.333333%
Interest Expense to be recorded = Issued Value of bonds*Yield Rate for four months
= $600,121*3.333333% = $20,004
Therefore, the interest expense to be recorded for the year ending October 31, 2017 is $20,004.
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