Question

Exercise 14-09 (Part Level Submission)

On June 30, 2020, Larkspur Company issued $3,660,000 face value of 13%, 20-year bonds at $3,935,340, a yield of 12%. Larkspur uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

(a) Your answer is correct.

Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2021, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)

Larkspur Company Balance Sheet December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal Stockholders' Equity
			$
Discount on Notes PayableCashBook Value of Bonds PayableLoss on Redemption of BondsPremium on Bonds PayableInterest ExpenseNotes PayableInterest PayableNotes ReceivableBad Debt Expense			$

Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2021? (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense reported for 2021

$

(2) Will the bond interest expense reported in 2021 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 2021 will be greater thanless thansame as 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

$

(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 greater thanless thanthe same as the total interest expense if the straight-line method of amortization were used.

Answer 1

Answer:

Larkspur Company Balance Sheet December 31, 2021. Long-term liabilities: Bonds payable, 13% due in 20 years $ Plus: Premium on bond payable 3,660,000 275,340 $ 3,935,340

Answer-(1):

Interest expense reported for 2021 = $471,914

Explanation:

Year SCHEDULE OF AMORTIZATION Amortization of Cash Paid Interest expense Bond Premium Unamortized (80,000,000 13%)(12% x previous CV) (3) - (2) Premium 275,340 237,900 236,120 1 780 273,560 237,900 236,014 1,886 271,674 237,900 235,900 2,000 269,674 237,900 235,780 2,120 267,555 237,900 235,653 2,247 265,308 31/12/2020 30/06/2021 31/12/2021 30/06/2022 31/12/2022 Credit balance in Bonds payable Acc. 3,660,000 3,660,000 3,660,000 3,660,000 3,660,000 3,660,000 Carrying value(CV) of Bonds (6) - (5) 3,935,340 3,933,560 3,931,674 3,929,674 3,927,555 3,925,308

Answer-(2):

The bond interest expense reported in 2021 will be less than the amount that would be reported if the straight-line method of amortization were used.

Explanation:

Cash Paid (80,000,000 x 13%) Year SCHEDULE OF AMORTIZATION Amortization of Interest expense Bond Premium Unamortized (3) - (2) Premium 275,340 231,017 6,884 268,457 231,017 6,884 261,573 231,017 6,884 254,690 231,017 6,884 247,806 231,017 6,884 240,923 31/12/2020 30/06/2021 31/12/2021 30/06/2022 31/12/2022 237,900 237,900 237,900 237,900 237,900 Credit balance in Bonds payable Acc. 3,660,000 3,660,000 3,660,000 3,660,000 3,660,000 3,660,000 Carrying value(CV) of Bonds (6) - (5) 3,935,340 3,928,457 3,921,573 3,914,690 3,907,806 3,900,923