Question

During 2018 and 2019, Kale Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31.

2018

Mar.	1		Issued $300,000 of 8 year, 5 percent bonds for $282,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2018.
Sept.	1		Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec.	31		Recognized accrued interest expense including the amortization of the discount.

2019

Mar.	1		Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Sept.	1		Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec.	31		Recognized accrued interest expense including the amortization of the discount.

Required

1. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Kale Co. have received?
2. Prepare the liabilities section of the balance sheet at December 31, 2018 and 2019.
3. Determine the amount of interest expense Kale would report on the income statements for 2018 and 2019.
4. Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019.

Answer 1

Before proceeding into section wise answer, we should summarized bond issue program.

Face Value of Bond	USD 300,000
Cash Received	USD 282,000
Discount on issue of Bond	USD 18,000
Frequency of Interest	Semi-Annually
Rate of Interest	5%
Discount amortization per Month	USD 187.5 (18000/96)

A. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? :-

Since bonds are issued at discount to its face value, market rate of interest is more that stated rate of interest i.e 5%.

If the bonds had sold at face value, what amount of cash would Kale Co. have received? :-

Had bond been sold at face value Kale Co. would have received USD 300,000.

A:- Since bonds were issued at discount of USD 18,000

B. Prepare the liabilities section of the balance sheet at December 31, 2018 and 2019

Liability	Dec 31,2018	Dec 31,2019
Face Value of Bond to be redeemed	USD 300,000	USD 300,000
Interest accrued but not paid (Interest of 3 month)	USD 5000	USD 5000

C.Determine the amount of interest expense Kale would report on the income statements for 2018 and 2019.

Interest Expenses	Dec 31,2018	Dec 31,2019
Interest accrued and paid	USD 7500	USD 10,000
Interest accrued but not paid (Interest of 3 month)	USD 5000	USD 5000
amortization of the discount.( USD 187.5 per month)	USD 1875	USD 2250
Total Expenses including Amortization	USD 14375	USD 17250

D. Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019.

Interest Expenses	Dec 31,2018	Dec 31,2019
Interest Paid	USD 7500	USD 15000