Question

1 question 2 parts

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred: The recorded amount of the debt is increased by the debt issue costs. The decrease in the effective interest rate caused by the debt issue costs is reflected in the interest expense The increase in the effective interest rate caused by the debt issue costs is reflected in the interest expense The debt issue costs are recorded separately as an asset

Answer 1

Answer 1

: The increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.

Explanation:

The debt issue costs result in a decrease in proceeds of the amount of borrowings in hand of the issuer & increases the effective interest rate. Thus for the accounting for debt issue costs is smililar to that of discount on bonds payable ie the effect of such costs is reflected in the interest expense .

Answer 2.    $18,200 gain

Explanation:

Premimum on issue of bonds = $2,596,000 - (2,500 * $1,000) = $96,000

Premimum amortized till July 1 , 2021 = $96,000 * (11 periods / 20 periods) = $52,800

Carrying value of bonds as on July 1 , 2021 = $2,596,000 - $52,800 = $2,543,200

Cash paid on retirement of bonds = 2,500 * $1,000 * 101 % = $2,525,000

Gain on the retirement of bonds = Carrying value of bonds as on July 1 , 2021 - Cash paid on retirement of bonds

= $2,543,200 - $2,525,000 = $18,200 gain