Exercise 14-9 (Part Level Submission) On June 30, 2017, Novak Company issued $3,

Question

Exercise 14-9 (Part Level Submission)

On June 30, 2017, Novak Company issued $3,300,000 face value of 13%, 20-year bonds at $3,548,257, a yield of 12%. Novak uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

(a)

The payment of interest and the amortization of the premium on December 31, 2018.

(Part C) Provide the answers to the following questions.

Exercise 14-9 (Part Level Submission)

On June 30, 2017, Novak Company issued $3,300,000 face value of 13%, 20-year bonds at $3,548,257, a yield of 12%. Novak uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Explanation / Answer

C-1)Total interest expense for 2018 : 212799.15+212697.09 = 425496.24

2)Interest expense reported is greater than straight line method

3)Total cost of Borrowing :interest paid - premium on bond

        =[214500*40 semiannual months ] -248257

= 8580000-248257

= 8331743

4)The total interest expense for life of bond will be sames as interest expense it straight line method is used.

Interest paid Interest expense premium amortised carrying value 31 Dec 2017 3,300,000*.13*6/1 214500 3,548,257 *.12*6/12= 212895.42 1604.58 3548257-1604.58=3546652.4 30 June 2018 214500 212799.15 1700.85 3546652.4-1700.85= 3544951.55 31Dec 2018 214500 212697.09 1802.91 3543148.64

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