Question

(a) Sage Co. sold $1,890,000 of 12%, 10-year bonds at 105 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Sage 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

$

Answer 1

Calculation of Interest

Calculation of Premium to be Ammortised

Face Value of Bond =$ 1,890,000/$ 105*100

= 1,800,000

Therefore Premium = 1,890,000-1,800,000

= $90,000

Note: Assuming Face Value of Bond as $100

If Straight Line Method is used for Premium ammortisation

Half year Ammortisation = $90,000/20

= $4500 per Half year

Calculation of Interest to be recorded in July 1 2020

Interest to be paid = $1,800,000*12%/2

= $108,000

Ammortisation of Premium = $4500

Net Interest =$108,000-$4500=$103,500

Calculation of Interest to be recorded in December  31 2020

Interest to be paid = $1,800,000*12%/2

= $108,000

Ammortisation of Premium = $4500

Net Interest =$108,000-$4500=$103,500

All amounts in Dollars

Date	Particulars	Debit	Credit
July1	Cash	108000
	Interest on Bond		103500
	Ammortisation of Bond		4500

All amounts in Dollars

Date	Particulars	Debit	Credit
Dec 31	Cash	108000
	Interest on Bond		103500
	Ammortisation of Bond		4500