Question

Presented below are two independent situations. (a) Larkspur Co.sold $1,970,000 of 12%, 10-year bonds at 102 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Larkspur 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 O decimal places, eg. 38,548.) Interest expense to be recorded $ (b) Cullumber Inc. issued $610,000 of 9%, 10-year bonds on June 30, 2020, for $505,047. This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Cullumber 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, eg. 1.251247 and final answer to decimal places, eg. 38,548.) Interest expense to be recorded $

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Answer 1

Solution (a) Larkspur Co. Issue Price of Bonds ($1970,000 x 102/100) less: Face Value of Bonds Premium on Issue $ $ $ 20,09,400 19,70,000 39,400 Amortization Schedule Cash Int Bond Premium Date paid Interest Exp amortization 01-01-2020 $ 01-07-2020 $1,18,200 $ 1,16,230 $ 1,970 $ 01-01-2021 $1,18,200 $ 1,16,230 $ 1,970 $ 01-07-2021 $ 1,18,200 $ 1,16,230 $ 1,970 $ 01-01-2022 $1,18,200 $ 1,16,230 $ 1,970 $ Premium Carrying Balance Value 39,400 $ 20,09,400 37,430 $ 20,07,430 35,460 $ 20,05,460 33,490 $ 20,03,490 31,520 $ 20,01,520 Interest Expense recorded on Dec 31, 2020 $ $ 1,16,230 Solution (b) Cullumber Inc. Face Value of Bonds less: Issue Price of Bonds Discount on Issue $ $ $ 6,10,000 5,05,047 1,04,953 Amortization Schedule Bond Cash Int Interest Exp Discount Date paid @ 6% amortization 30-06-2020 $ 31-12-2020 $ 27,450 $ 30,303 $ 2,853 $ 30-06-2021 $ 27,450 $ 30,474 $ 3,024 $ Discount Carrying Balance Value 1,04,953 $ 5,05,047 1,02,100 $ 5,07,900 99,076 $ 5,10,924 $ 20,202 Interest Expense recorded on October 31, 2020 ($30,303 x 4/6)

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