During 2018 and 2019, Kale Co. completed the following transactions relating to

Question

During 2018 and 2019, Kale Co. completed the following transactions relating to its bond issue. The company's fiscal year ends on December 31. 2018 Mar 1 Issued $200,000 of 8 year, 6 percent bonds for $194,000. The semiannual cash payment for interest is due on March 1 and Sept. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for Dec. 31 Recognized accrued interest expense including the amortization of the discount. 2019 Mar. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for Sept. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for Dec. 31 Recognized accrued interest expense including the amortization of the discount September 1, beginning September 2018 interest interest. interest. Required a. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Kale Co. have received? b. Prepare the liabilities section of the balance sheet at December 31, 2018 and 2019. c. Determine the amount of interest expense Kale would report on the income statements for 2018 and 2019 d. Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019.

Explanation / Answer

A. When the bond was issued, the market rate of interest was more than the stated rate of interest. If the bonds were issued at face value, the cash received would have been $200,000

B.   

Kale CO.

Balance Sheet (Partial)

As on December 31

2018 2019 Liabilities 6% Bonds 200,000 200,000 Interest Payable 4,000 4,000 Less: Dicount on Issue of Bonds (5375) (7500) Carrying Value of Bonds payable 198,625 196,500 Total Liabilities 198,625 196,500

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