Question

(a) George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2020. The bonds were dated January 1, 2020, 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, 2020, and December 31, 2020. (Round answer to 0 decimal places, e.g. 38,548.) Interest expense to be recorded $ (b) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2020, 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, 2020. (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) Interest expense on July 1, 2020

Issue price of bonds (2000000*1.04)	2080000
(less): par value of bonds	2000000
Premium on bonds payable	80000
(÷) no of interest payments (10 years* 2 times)	20 times
= Premium amortization (Straight-line)	4000
Interest payments (2000000*10%*6/12)	100000
(Less): Premium amortization	4000
Interest expense	96000

Under straight line method, Interest expense is $96000 for every time.

.

b) Interest expense

Interest to be calculated for 4 months (From June 30, 2020 to October 31, 2020)

            Interest expense = Carrying value x effective interest rate

            Interest expense = $562500 x 10% x (4 months/12 months)

            Interest expense = $56250 x 4/12

          Interest expense = $18750

            Under effective interest method, interest expense is $18750