Question

Presented below are three independent situations.

(a) Vaughn Co. sold $ 2,180,000 of  12%,  10-year bonds at  106 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Vaughn uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$

(b) Bramble Inc. issued $ 620,000 of  9%,  10-year bonds on June 30, 2017, for $ 513,327. This price provided a yield of  12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Bramble uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$

Answer 1

a) Issue price of bonds = 2180000*1.06 = $2310800

Premium on bonds payable = 2310800-2180000 = $130800

Amortization of premium on bonds payable = 130800/20 = $6540 per semiannual period

Interest expense = Interest paid - Amortization of premium on bonds payab;e

= (2180000*12%*6/12)-6540

Interest expense = $124260

The amount of interest expense to be reported on July 1, 2017, and December 31, 2017 = $124260

b) Interest expense recorded on October 31,2017 = 513327*12%*4/12 = $20533