Question

Which of the following is true concerning financial statement disclosure for debt instruments? a. The fair value of financial instruments must be disclosed either in the body of the financial statements or in disclosure notes b. Disclosures should include the aggregate amounts payable for each of the next five years for any long-term borrowing c. Both the issuer and the investor report interest as an operating activity on the statement of cash flows d. All of the above

Chism Corporation issued $10 million face amount of bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. The following is a partial bond amortization schedule for the bonds. Payment Cash Effective Decrease in Outstanding Interest Balance Balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 4 400,000 What is the interest expense on the bonds in 2019? a. $119,241 b. $342,961 c. $680,759 d. $800,000

Answer 1

Req 1	Option d	All of the above
Req 2	Option c	680,759
						Calculation
	Payment Cash	Interest expense	Premium	Bond Balance		Interest expense	Premium	Bond Balance
2018				11,487,747
30-Jun-18	400,000	344,632	55,368	11,432,379
31-Dec-18	400,000	342,971	57,029	11,375,350
		687,603
2019
30-Jun-19	400,000	341,261	58,739	11,316,611
31-Dec-19	400,000	339,498	60,502	11,256,109		11,316,611*3%	400,000-339,498	11,316,611-60,502
		680,759				Bond Balance * Effective Interest rate
Workings
Effective Interest rate		Interest expense/ Bond Carrying Balance
		=344,632/ 11,487,747*100
Effective Interest rate		3%