Sheffield Corp. issued $7080000 of 11%, ten-year convertible
bonds on July 1, 2020 at 96.1 plus accrued interest. The bonds were
dated April 1, 2020 with interest payable April 1 and October 1.
Bond discount is amortized semiannually on a straight-line basis.
On April 1, 2021, $1416000 of these bonds were converted into 600
shares of $20 par value common stock. Accrued interest was paid in
cash at the time of conversion.
If "interest payable" were credited when the bonds were issued,
what should be the amount of the debit to "interest expense" on
October 1, 2020?
$389400.
$201780.
$187620.
$194700.
Answer:
Interest expense on October 1 = $201780
Interest Expense per month = [$7080000 - ($7080000 * 96.1%) ] / 117 months
= ($7080000 - $6803880) / 117 months
= $2360per month
Interest expense on October 1 = ($7080000* 11% * 3/12) + ($2360 * 3months)
= $194700 + $7080
= $201780
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