Question

Multiple Choice Question 78 On October 1, 2017 Sheridan Company issued 6%, 10-year bonds with a face value of $600000 at 103. Interest is paid on October 1 and April 1, with any premiums or discounts Bond interest expense reported on the December 31, 2017 income statement of Sheridan Company would be O $173280 O $91200 $95760 86640

Answer 1

If Bonds Issued at Premium, Interest Expense = Interest Paid or Payable + Amortized Portion of Premium Face Value of Bonds Issued at $ 6,080,000.00 103 So, Issue Price = $6,080,000 x 103% = $ 6,262,400.00 Premium on Bonds = Issue Price - Face Value = $6,262,400 - $6,080,000 = $182,400.00 Annual Premium Amortization = $182,400/10 Yrs = $18,240.00 As the Bonds Issued on October 1, 2017; Interest expense accrued from Oct.1, 2017 to Dec.31, 2017 total 3 months. 91,200.00 Interest Expense for the Year 2017 calculated as follows Interest Payable for Oct.1 to Dec.31 ($6,080,000 x 6% x 3/12) $ Less: Premium Amortization ($18240/12 months x 3 months) $ Interest Expense for the Year 2017 $ (4,560.00) 86,640.00 So, Option 4 is Correct Answer.

Answer 2

SOLUTION :

Face value of the bond = 6080000

Premium amount = 6080000* (103 - 100)/100 = 182400

Maturity period of the bond = 10 years.

Coupon rate is 6%, paid semi-annually

Hence, coupon amount per period of payments

= Interest expense on the bond per period

= 6080000 * 0.06/2 

= 182400

Premium of 182400 is to be amortised for 20 semi-annual periods

As per straight line method amortisation per period

= 182400 / 20 

= 9120

So, total expense (considered as effective interest) per period

= Coupon amount - amortised premium

= 1824000-  9120

= 173280

Bond  issued on October 1, 2017, so effective interest for 3 months is applicable in the year ending on Dec. 31, 2017.

Hence, effective interest expense in 2017 :

= 1/2 * effective interest per semi-annual period

= 1/2 * 173280

= 86640  : 4th Option (ANSWER)