Question

On July 1, 2016, Malzone Corporation issued bonds with a face value of $200,000 and 12% interest payable semiannually. The bonds will mature on June 30, 2019. The market rate of interest at the time of issuance was 14%, so the bonds were issued at a discount of $14,107. Using the effective-interest method, the amount of discount that should be amortized by Malzone on December 31, 2016, is

$ 846.42

$1,404.70

$1,012.51

$ 987.49 On January 1, 2007, Reed, Inc., issued $50,000 of ten-year, 8% bonds for $43,800. Interest was payable semiannually. The effective yield was 10%. The effective interest method of discount amortization was used. What amount of interest expense should be recorded for the six-month period ending December 31, 2007? $2,180.50 $2,209.00 $2,205.50 $2,199.50 Iacono Company has $200,000 face value, ten-year bonds outstanding, with unamortized bond premiums on December 1 of $15,600. On that day, the company reacquired all of these bonds at 104, and retired them. As a result, the company would recognize a: a loss on bond redemption of $19,600 a gain on bond redemption of $7,600 a gain on bond redemption of $11,600 a loss on bond redemption of $23,600

Answer 1

• All working forms part of the answer
• Answer 1

--Face Value = $ 200,000
--Discount = $ 14,107
--Carrying value for effective interest = 200000 – 14107 = $ 185,893

--Interest payable = 200000 x 12% x 6/12 = $ 12,000
--Interest expense = 185893 x 14% x 6/12 = $ 13,012.51

--Amount of discount amortised = 13012.51 – 12000 = $ 1,021.51

--Correct Answer = Option #3: $ 1,021.51

• Answer 2

--Amount of Interest expense for first six month = 43800 x 10% x 6/12 = $ 2,190
--Interest payable for first six month = $ 50000 x 8% x 6/12 = $ 2,000
--Discount amortised = 2190 – 2000 = $ 190

--Carrying Value for Interest expense for six month ending Dec 31 2007 = 43800 + 190 = $ 43,990

--Interest expense for Dec 31, 2007 = 43990 x 10% x 6/12 = $ 2,199.5

--Correct Answer: Option #4: $ 2,199.5

• Answer 3

--Correct answer is Option #2: Gain on Bond redemption of $ 7,600.

--Go through following redemption entry for answer:

Accounts title	Debit	Credit
Bonds payable [face Value]	$        200,000.00
Premium on Bonds payable [Un-Amortised balance]	$          15,600.00
Cash [200000 x 104%]		$      208,000.00
Gain on Bond redemption [balancing figure]		$           7,600.00
(Bonds retired)