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On January 1, 2018, Paradiso Company issued 1,000 of its 8%, $1,000 bonds at 93. Interest...

On January 1, 2018, Paradiso Company issued 1,000 of its 8%, $1,000 bonds at 93. Interest is payable semiannually on June 30 and December 31. The bonds will mature on December 31, 2027. If the company uses straight-line amortization, determine the amount of interest expense for 2018.

A) $73,000. B) $82,000. C) $87,000. D) $89,000.

Solutions

Expert Solution

Correct option is D) $87000

The Straight line amortisation amortize premium or discount on issue of bond over the life of Bond

Price at 93. is a quote value in case of bond , as all bond are traded at percentage of par value hence 93 means 93% of Face value ie $930

As the Issue price is less then the face value , the bond are issued at discount

Discount = Face value - Issue price

=1000($1000-930)

=$70000

Amortisation of Discount =Total Discount payable on Bond / life of bond or yesrs till maturity

= $70000/10

=$7000 per year

Hence the interest on bond per year are adjusted against the interest and Bond value , till the carrying value of bond equals to is Face value / Redemption value

the Interest expense will be for whole year though it is paid semiannual but question ask for the year

Cash payment will be $80000 ( 8% of FV of bond )

Discount on Bond payable $7000 (Amortised value of Discount

Interest Expence will be booked as $ 87000(Total Interest+ Discount amortised )

All the above are book in half half year

ekkarill92 answered 1 year ago
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