Presented below are three independent situations (a Sandhill Co sold $1,950,000

Question

Presented below are three independent situations (a Sandhill Co sold $1,950,000 of 12%, 10-year bonds at 106 on January 1 2017. The bonds were dated January 1 201, and pay interest on uly and January 1 Sandhill 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 O decimal places, e.g. 38,548.) Interest expense to be recorded (b) Teal Inc. issued $570,000 of 9%, 10-year bonds on June 30, 2017, for $471,929. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Teal 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.) Interest expense to be recorded

Explanation / Answer

Answer a.

Face Value of Bonds = $1,950,000
Proceed from Sale = 106%*$1,950,000
Proceed from Sale = $2,067,000
Semi-annual Period to maturity = 20 (10 years)

Premium on Bonds Payable = Proceed from Sale - Face Value of Bonds
Premium on Bonds Payable = $2,067,000 - $1,950,000
Premium on Bonds Payable = $117,000

Annual Coupon Rate = 12%
Semi-annual Coupon Rate = 6%
Semi-annual Coupon = 6%*$1,950,000
Semi-annual Coupon = $117,000

Semi-annual Amortization of Premium = Premium on Bonds Payable /Semi-annual periods to maturity
Semi-annual Amortization of Premium = $117,000 / 20
Semi-annual Amortization of Premium = $5,850

Interest Expense = Semi-annual Coupon - Semi-annual Amortization of Premium
Interest Expense = $117,000 - $5,850
Interest Expense = $111,150

So, interest expense recorded on July 1, 2017 and December 31, 2017 is $111,150

Answer b.

Face Value of Bonds = $570,000
Proceed from Sale = $471,929
Semi-annual Period to maturity = 20 (10 years)

Discount on Bonds Payable = Face Value of Bonds - Proceed from Sale
Discount on Bonds Payable = $570,000 - $471,929
Discount on Bonds Payable = $98,071

Annual Coupon Rate = 9%
Semi-annual Coupon Rate = 4.5%
Semi-annual Coupon = 4.5%*$570,000
Semi-annual Coupon = $25,650

Annual Interest Rate = 12%
Semi-annual Interest Rate = 6%

October 31:

Interest Expense = $471,929 * 6% * 4/6
Interest Expense = $18,877

So, interest expense recorded on October 31, 2017 is $18,877.

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