Wildhorse Co. sold $3,200,000, 9%, 10-year bonds on January 1, 2022. The bonds were dated January...

Wildhorse Co. sold $3,200,000, 9%, 10-year bonds on January 1, 2022. The bonds were dated January 1, 2022, and pay interest on January 1. The company uses straight-line amortization on bond premiums and discounts. Financial statements are prepared annually. Prepare the journal entries to record interest expense for 2022 under both of the bond issuances assuming they sold at: (1) 101 and (2) 98. Show the long-term liabilities balance sheet presentation for issuance of the bonds sold at 101 at December 31, 2022.

Solutions

Expert Solution

Answer a.

If Issue Value of Bonds is 101:

Face Value of Bonds = $3,200,000

Issue Value of Bonds = $3,200,000 * 101%
Issue Value of Bonds = $3,232,000

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $3,232,000 - $3,200,000
Premium on Bonds = $32,000

Annual Coupon Rate = 9.00%
Annual Coupon = 9.00% * $3,200,000
Annual Coupon = $288,000

Time to Maturity = 10 years

Annual Amortization of Premium = Premium on Bonds / Time to Maturity
Annual Amortization of Premium = $32,000 / 10
Annual Amortization of Premium = $3,200

Annual Interest Expense = Annual Coupon - Annual Amortization of Premium
Annual Interest Expense = $288,000 - $3,200
Annual Interest Expense = $284,800

If Issue Value of Bonds is 98:

Face Value of Bonds = $3,200,000

Issue Value of Bonds = $3,200,000 * 98%
Issue Value of Bonds = $3,136,000

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $3,200,000 - $3,136,000
Discount on Bonds = $64,000

Annual Coupon Rate = 9.00%
Annual Coupon = 9.00% * $3,200,000
Annual Coupon = $288,000

Time to Maturity = 10 years

Annual Amortization of Discount = Discount on Bonds / Annual Period
Annual Amortization of Discount = $64,000 / 10
Annual Amortization of Discount = $6,400

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $288,000 + $6,400
Annual Interest Expense = $294,400

Answer b.

jeff jeffy answered 1 year ago

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