Straight-line amortization of a bond discount
During 2012 and 2013, Gupta Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31.
2012 |
|
Mar. 1 | Issued $100,000 of eight-year, 7 percent bonds for $96,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2012. |
Sept. 1 | Recognized interest expense including the amortization of the discount and made thesemiannual cash payment for interest. |
Dec. 31 | Recognized accrued interest expense including the amortization of the discount. |
2013 |
|
Mar. 1 | Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. |
Sept. 1 | Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. |
Dec. 31 | Recognized accrued interest expense including the amortization of the discount. |
Required
a.When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Gupta Co. have received?
b. Prepare the liabilities section of the balance sheet at December 31, 2012 and 2013.
c. Determine the amount of interest expense Gupta would report on the income statements for 2012 and 2013.
d. Determine the amount of interest Gupta would pay to the bondholders in 2012 and 2013.
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