Question

2a) On Auerbach Inc. ​​​​​​​January 31, 2021, B Corp. issued $700,000 face value, 9% bonds for $700,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2021, balance sheet?

Multiple Choice:

$15,750.

$31,500.

$47,250.

$42,000.

2b) Auerbach Inc. issued 6% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $225 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 8%.

Assuming that Auerbach issued the bonds for $194,422,478, what interest expense would it recognize in its 2021 income statement? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

Multiple Choice

• $0.

• $3,888,450.

• $7,776,899.

• $4,500,000.

2c) Later on January 1, 2021, Auerbach Inc. issued 1,300 of its 8%, $1,000 bonds at 98.0. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2031. Auerbach Inc. paid $53,000 in bond issue costs. Solo uses straight-line amortization.

What is the carrying value of the bonds reported in the December 31, 2021, balance sheet?

Multiple Choice

• $1,743,000.

• $1,690,000.

• $1,286,600.

• $1,228,900.

Answer 1

ANSWER:

2a) $15,750

Explanation:

Interest for 3 months will be accrued on bonds as a liability for interest payable. The interest will be for the period July 1 till September 31.

Interest accrued =(700,000 x 9%)x (3 / 12) = $15,750

2b) $3,888,450

Explanation:

Cash received from issue of bonds = $194,422,478

Effective interest rate = 8%

Bond issue date = October 1, 2021

Year end = December 31, 2021

For the year ended December 31, 2021, interest expense is to be calculated for 3 months.

Interest expense = Cash received from issue of bonds x Effective interest rate x Time period

= 194,422,478 * 8% * (3 / 12) = $3,888,450

2c) $1,228,900

Explanation:

Cash received on bond issue = 1,300 * 980= $1,274,000

Bond issue cost = $53,000

Net cash received = Cash received on bond issue - bond issue costs = 1,274,000 - 53,000 = $1,221,000

Face value of bond issue = 1,300 * 1,000 = $1,300,000

Discount on bond issue = Face value of bond issue - Net cash received = 1,300,000 - 1,221,000 = $79,000

Period of bond issue = 10 years (2031 - 2021)

Discount amortization = Discount on bond issue / Period of bond issue = 79,000 / 10 = $7,900

Carrying value of bond as on January 1, 2021 = $1,221,000

Carrying value of bond as on December 31, 2021

= Carrying value of bond as on January 1, 2018 + Discount amortization = 1,221,000 + 7,900 = $1,228,900