Question

On December 31, 2018, Squidward Corporation issued $500,000, 8%, 20-year bonds for $414,210 cash when the market rate of Interest was 10%. The bonds pay interest semi-annually each June 30 and December 31. Squidward uses the effective interest method of amortization to amortize and premium or discount. Was this bond issued at a premium or discount? Type in a 1 for discount and a 2 for premium. exact number, no tolerance

Answer 1

Solution $500,000 $414,210 $85,790 Face Value of Bonds Bond issue price Discount on issue of Bonds ($500,000 - $414,210) Stated rate of interest Market rate of interest Bond life Interest payment frequency 8% 10% 20 Years Semi-Annual Semi-Annual interest payment = $500,000 x 8% x 6/12 = $20,000 Required 1.: Was bond issued at a premium or discount? The cash received on issue of bonds was less than the face value of bonds, hence the bonds were issued at discount. 1 Required 2.: Dollar amount of premium or discount? Dollar amount of discount = Face value - Cash received on Bonds issue = $500,000 - $414,210 = $85,790 Dollar amount of discount $85,790 Required 3.: Effective Interest Amortization Table Date Stated Interest Effective Interest Amortization Issue 6/30/2019 12/31/2019 6/30/2020 12/31/2020 $20,000 $20,000 $20,000 $20,000 $20,711) $20,746 $20,783 $20,823 $711 $746 $783 Carrying Value $414,210 $414,921 $415,667 $416,450 $417,273 Required 4.: Amount of interest expense to be reported on the 2019 income statement Effective Interest expense for the semiannual period end 6/30/2019 Effective Interest expense for the semiannual period end 6/31/2019 Total interest expense to be reported on the 2019 Income statement $20,711 $20,746 $41,457 Total interest expense to be reported 1 $41,457 Required 5.: Amount of interest expense to be reported on the 2020 income statement Effective Interest expense for the semiannual period end 6/30/2020 Effective Interest expense for the semiannual period end 6/31/2020 Total interest expense to be reported on the 2019 Income statement $20,783 $20,823 $41,606 Total interest expense to be reported | $41,606