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 $350,000 of 10 year, 6 percent bonds for $341,000. 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

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?

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

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

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

Answer 1

1. As the Bonds are issued at discounted value it means the market interest rate is higher than the coupon rate of 6%

2. If the Bonds are sold at Face Value the company will receive the whole amount of $350000

3. Liabilities Section of Balance Sheet

4. Amount of Interest Expense Reported in Income Statement for 2018 and 2019

For 2018:

Interest Expenses = Interest Expense on Sept 30. + Amortisation on Sept 30. + Accrued Interest on Dec 31. + Amortisation on Dec 31.

Interest Expenses = $350000 * 3% + $9000 / 20 + $350000 * 1.5% + $450 / 2

Interest Expenses = $10500 + $450 + $5250 + $225 = $16425

For 2019:

Interest Expenses = Interest Expense on Mar31. & Sept 30. + Amortisation on Mar 31 & Sept 30. + Accrued Interest on Dec 31. + Amortisation on Dec 31.

Interest Expenses = $5250 + $10500 + $225 + $450 + $5250 + $225 = $21900

5. Amount of Interest Kale Co. will pay

For 2018 = September Interest i.e., $10500

For 2019 = March Interest + September Interest i.e., $21000