Question

Presented below are two independent situations.

(a) Grouper Co. sold $2,020,000 of 12%, 10-year bonds at 104 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Grouper uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2020, and December 31, 2020. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$

(b) Monty Inc. issued $580,000 of 9%, 10-year bonds on June 30, 2020, for $480,209. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Monty uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2020. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$

Answer 1

Requirement (a):

Interest expense on July 1,2020

$117,160

Calculations:

Issue price of the bonds ($2,020,000 x 1.04)	$2,100,800
(Less): Par value of bonds	($2,020,000)
Premium on bonds payable	$80,800
÷ No. of interest payments (10 years x 2 times)	20 times
= Premium amortization (Straight-line)	$4,040
Interest payment (2,020,000 x 12% x 6/12)	$121,200
(Less): Premium amortization	($4,040)
Interest expense	$117,160

Under straight line method, Interest expense is $117,160 for every time.

Hence, interest expense to be reported on July 1,2020 is $117,160 and Interest expense to be reported on Dec 31,2020 is $117,160

Requirement (b):

Interest expense

$19,208

Calculations:

Interest to be calculated for 4 months (From June 30,2020 to October 31,2020)

Interest expense = Carrying value x effective interest rate

Interest expense = $480,209 x 12% x (4 months/12 months)

Interest expense = $57,625 x 4/12

Interest expense = $19,208

Under effective interest method, interest expense is $19,208