Question

On January 1, 2020. K Company issued three-year bonds with a face value of

＄670,000.When sold, the market price for the bonds was 704,531.80

The bonds paid interest annually on December 31 and mature on December 31 2022.

The stated interest rate is 10%. 

At the time the bonds were issued, the market interest rate for debt of identical risk and maturity was 8%

There are no issue costs.

K's amortizes discount and premium using the Effective Interest method.

here is the amortization table for the K company bonds,

Date	Cash	Int Exp.	prem Amout	Carry Value
1/1/20				704,531.80
12/31/20	67,000.00	56,362.54	10,637.46	693,794.34
12/31/21	67,000.00	55,511.55	11,488.45	682,405.89
12/31/22	67,000.00	54,594.11	12,405.89	670,000.00

Assume K company's fiscal year ends on November 30.

Give the interest expense reported on K company's income Statement for the fiscal year ended November 30, 2021.

Hint: This is for a full twelve-month period.

Answer 1

Answer:

Interest Expense at the close of year at Nov 30, 2021=(693,894.34*8%*11/12)+(704,531.80*8%*1/12)=(55,511.55*11/12)+(56,362.54*1/12)=50,885.59+4696.88=$55,582.47

Explanation:

On Jan 1, 2021 carrying value of the bond was $693,894.34 after payment of interest of Dec 31, 2020. On this amount the interest will start accumulating and at the end of the fiscal year on Nov 30, 2021, eleven months would have passed. On this date company will debit interest expense for $50,885.59 as adjusting entry for making due interest payable. Further, for payment of interest of Dec 31, 2020 company would have debited interest expense of $4696.88 for payment in addition to interest payable for the fiscal year ended Nov 30, 2020. Both of these amounts will be interest expense for the fiscal year ended on Nov 30, 2021.