Question

1. Merchant Company issued 10-year bonds on January 1. The 7% bonds have a face value of $709,000 and pay interest every January 1 and July 1. The bonds were sold for $589,257 based on the market interest rate of 8%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of

a.$23,570

b.$20,624

c.$28,360

d.$24,815

2. Franklin Corporation issues $94,000, 10%, five-year bonds on January 1 for $98,200. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is

a.$4,280

b.$3,760

c.$7,520

d.$4,180

3. Bonds Payable has a balance of $991,000 and Premium on Bonds Payable has a balance of $10,901. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?

a.$18,829 loss

b.$10,901 loss

c.$1,020,730 gain

d.$10,901 gain

Answer 1

1) Interest Expenses = 589,257*8%*6/12 = A)$23,570 (Answer)

2) Interest Expenses = Cash interest - Premium amortized

Cash interest = 94,000*10%*6/12= 4,700

Premium amortized =( 98,200-94000) /10 = 420

Interest Expenses = 4700-420 =A) $4,280 (Answer)

3) Bond Face Value = 991,000

Bond Redeemed at 103 = 991000*1.03 = 1020730

Less Bond Balance = 991,000

Loss on Bonds Payable = 1020730-991000-10901= $18,829

A)$18,829 loss