Question

During 2018 and 2019. Kale Co. completed the following transactions relating to its bond issue. The company's fiscal year ends on December 31 2018 Mar. 1 Issued $300,000 of 10 year, 7 percent bonds for $285,000. The semiannual canh payment for interest is due on March 1 and September 1, beginning September 2018. Sept. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. Dec.31 Recognized accrued interest expense including the amortization of the discount. 2019 Mar. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. Sept. 1 Recognised interest expense including the amortization of the discount and made the semiannual cash payment for interest. Dec.31 Recognized accrued interest expense including the amortization of the discount. Required a. When the bonds were issued, was the market rate of Interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Kale Co have received? b. Prepare the abilities section of the balance sheet at December 31, 2018 and 2019 c. Determine the amount of interest expense kale would report on the income statements for 2018 and 2019, d. Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019 Complete this question by entering your answers in the tabs below. Reg A Reg B Reg C When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Kale Co. have received? Show less than the stated rate of Was the market rate of interest Cash received

Answer 1

a. When the bonds were issued the market rate of interest was more than the stated rate of interest.

Cash received: $300000

b.

KALE CO.
Balance Sheet (Partial)
As of December 31
	2018	2019
Liabilities
Interest payable	7000	7000
Bonds payable	300000	300000
Less: Discount on bonds payable	13750	12250
Carrying value of bonds payable	286250	287750
Total liabilities

Working:

Interest payable = $300000 x 7% x 4/12 = $7000

	2018	2019
Beginning Balance in Discount on bonds payable ($300000 - $285000)	15000	13750
Amortization on Mar. 1 ($15000/20 x 2/6)	0	250
Amortization on Sept. 1, ($15000/20)	750	750
Amortization on Dec. 31, ($15000/20 x 4/6)	500	500
Ending balance in Discount on bonds payable	13750	12250

c. & d.

		2018	2019
c.	Interest expense	18750	22500
d.	Interest paid ($300000 x 7% x 6/12);($300000 x 7%)	10500	21000