Question

A company issued 6-year, 8% bonds with a par value of $350,000. The market rate when the bonds were issued was 7.5%. The company received $353,500 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Multiple Choice

• $27,708.

• $13,708.

• $14,000.

• $28,000.

• $14,292.

A corporation reports the following year-end balance sheet data. The company's working capital equals:

Cash	$	44,000		Current liabilities	$	79,000
Accounts receivable		59,000		Long-term liabilities		39,000
Inventory		64,000		Common stock		104,000
Equipment		149,000		Retained earnings		94,000
Total assets	$	316,000		Total liabilities and equity	$	316,000

Multiple Choice

• $88,000

• $167,000

• $79,000

• $316,000

• $198,000

Answer 1

Bond premium amortized each period = (Carrying value of the bonds - Face value of the bonds) / Number of interest periods

= ($353,500 - $350,000) / (6 * 2)

= $292

Interest expense = Interest paid - Bond premium amortized

= ($350,000 * 8% * 1/2) - $292

= $13,708

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Working capital = Current assets - Current liabilities

= (Cash + Accounts receivable + Inventory) - Current liabilities

= ($44,000 + $59,000 + $64,000) - $79,000

= $88,000