Question

E14-8 (Determine Proper Amounts in Account Balances) Presented below are two independent situations.
(a) George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1,
2017, and pay interest on July 1 and January 1. If Gershwin 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.
(b) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield
of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective-
interest method, determine the amount of interest expense to record if financial statements are issued on
October 31, 2017.

Answer 1

Answer :-

a) Bond Face value = $2,000,000

Bond Issue price = $ 2,000,000 × 104 %

Bond Issue price = $ 2,080,000

Premium on Bond = Bond Issue price - Bond Face Value

Premium on Bond = $ 2,080,000 - $2,000,000

Premium on Bond = $80,000

Year	Interest Paid ($2,000,000 × 10% × 6/12)	Premium on Bond Amortization ( Premium on Bond / Bond years × 6/12 months)	Interest Expense (Interest Paid - Premium on Bond)
July 1,17	$100,000	$4,000 ( $80,000 / 10 years × 6/12 months)	$96,000
Dec 31,17	$100,000	$4,000 ( $80,000 / 10 years × 6/12 months)	$96,000

b) InterestExpenses is calculated for four months ie. July to October.

Interest Expenses = Bond Cost × Bond yield × 4/12 months

Bond Cost = $562,500

Bond Yield = 10%

Interest Expenses = $562,500 × 10% × 4/12 months

Interest Expenses = $18,750

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