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The Stockholders’ Equity section of the Balance Sheet of Carpenter Corporation on December 31, 2015, showed...

The Stockholders’ Equity section of the Balance Sheet of Carpenter Corporation on December 31, 2015, showed Cumulative Preferred 8% Stock, $48 par (1,020 shares authorized, 453 shares issued); Common Stock, $23 par (26,027 shares authorized, 11,175 shares issued); and Retained Earnings of $1,063. The Notes to the Financial Statements in the Annual Corporate Report for 2015 indicate that the market values of the stock are $41 per share (Cumulative Preferred) and $17 per share (Common). Forecasts in the Annual Report also indicate that investments in future growth in 2016 are expected to result in sustained increased profits. In consideration of these matters, the Board of Directors has secured approval from the Securities and Exchange Commission for a bond issuance. The Board of Directors has also decided to forego paying dividends in 2015, and to repurchase shares of the corporation’s common stock at par, with a view to reselling the stock when market rates rise with increased profitability. On January 2, 2016, $209,160 in 11 year, 7% bonds with a market interest rate of 9%, and interest payable semiannually, were issued for $186,983. On January 3, the corporation purchased 2,192 shares of its common stock at par. Profits soared during 2016, and on May 1, the corporation resold 1,531 shares of treasury stock, at $9 above par. On June 30, bond interest was paid. On December 31, the corporation showed an after tax Net Income of $57,899. On December 31, bond interest was paid; and dividends were declared and paid. Common shareholders received $2.21 per share. What is the Bond Interest Expense on the Income Statement on December 31, 2016?

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Answer #1

What is the Bond Interest Expense on the Income Statement on December 31, 2016?

Bond interest to be recorded on June 30 = $186983 x 9% x 1/2 = $8,414.24

Cash interest paid to bondholder on June 30 = $209,160 x 7% x 1/2 = $7,320.60

Therefore,

Discount on bonds payable amortized on June 30 = $8,414.24 - $7,320.60 = $1,093.64

Now,

Bond interest to be recorded on December 31 = ($186983 + $1093.64) x 9% x 1/2 = $8463.45

Thus,

Bond interest expense on the income statement on December 31, 2016 = $8,414.24 + $8,463.45 = $16,877.70

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