Homework Answers
Answer 1
: The increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.
Explanation:
The debt issue costs result in a decrease in proceeds of the amount of borrowings in hand of the issuer & increases the effective interest rate. Thus for the accounting for debt issue costs is smililar to that of discount on bonds payable ie the effect of such costs is reflected in the interest expense .
Answer 2. $18,200 gain
Explanation:
Premimum on issue of bonds = $2,596,000 - (2,500 * $1,000) = $96,000
Premimum amortized till July 1 , 2021 = $96,000 * (11 periods / 20 periods) = $52,800
Carrying value of bonds as on July 1 , 2021 = $2,596,000 - $52,800 = $2,543,200
Cash paid on retirement of bonds = 2,500 * $1,000 * 101 % = $2,525,000
Gain on the retirement of bonds = Carrying value of bonds as on July 1 , 2021 - Cash paid on retirement of bonds
= $2,543,200 - $2,525,000 = $18,200 gain
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