Question

situations. (a) George Gershwin Co. sold $2,000,000 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 Gershwin 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 (b) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective- interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017 U ILUN GRUUPWORK (Determine Proper Amounts in Account Balances) Presented below are two independent

Answer 1

a) Bonds isssue price = $2,000,000*104% Bonds isssue price = $2,080,000 Premium on bonds payable = $2,080,000 - $2,000,000 Premium on bonds payable = $80,000 Number of periods = 10*2 = 20 Amortization of premium = $80,000/20 Amortization of premium = $4,000 Cash Interest paid = $2,000,000*10%*6/12 Cash Interest paid = $100,000 Interest expense = $100,000 - $4,000 Interest expense = $96,000 Interest expense to be recorded = $96,000 Note: Interest expense is same for July 1, 2017 and December 31, 2017 b) Interest expense to be recorded = $562,500*10%*4/12 Interest expense to be recorded = $18,750