Question

# On January 1, 2019, Drennen Inc. issued \$4.1 million face amount of 10-year, 14% stated rate...

On January 1, 2019, Drennen Inc. issued \$4.1 million face amount of 10-year, 14% stated rate bonds when market interest rates were 12%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2028.

b-1. Assume instead that the proceeds were \$4,029,000. Use the horizontal model to record the payment of semiannual interest and the related discount amortization on June 30, 2019, assuming that the discount of \$71,000 is amortized on a straight-line basis. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Solution:

Financial statement effect:

Workings:

Amortization of discount as on June 30, 2019 = (\$71,000 / 10)/2 = \$3,550

Payment of cash toward interest = \$4,100,000×14% / 2 = \$287,000

Interest expense = \$287,000 + 3,550 = \$290,550

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