Question

In: Accounting

On 7/1/18, Cardinals Co issued 3,800 of its $1,000 face value, 9%, 8-year bonds at {104}...

On 7/1/18, Cardinals Co issued 3,800 of its $1,000 face value, 9%, 8-year bonds at {104} plus accrued interest. The bonds mature on 6/1/26, and pay interest each 6/1 and 12/1. The straight-line method is used to amortize any discount or premium.

** REQUIRED:

1) Determine the following items:

a) interest expense reported FYE 12/31/18. 161400
b) balance of the premium account at 12/31/18. 142400
c) carry value of the bonds at 12/31/19. 3923200

Here are the correct answers. Can you please explain how they were computed.

Expert Solution

Note

Cash received on issue of bonds = 3,800 * $1,000 *104 % = $3,952,000
Life of bonds : 7/1/18 - 6/1/26 = 95 months
Total Premium on bonds : 3,800 * $1,000 * (104 - 100) % = $152,000
Interest for payment per annum = 3,800 * $1,000 * 9 % = $342,000
Premium amorzitation per annum = (Premium on bonds / Life of bonds) * 12 month = ($152,000 / 95 months) * 12 months = $19,200
Interest Expense for the finanial year = Interest for payment per annum - Premium amorzitation per annum = $342,000 - $19,200 = $322,800

Answer a

Interest expense reported FYE 12/31/18 ( July 2018 to Dec 2018 : 6 months)

= $322,800 * (6 months / 12 months) = $161,400

Answer b

Balance of the premium account at 12/31/18 = Total Premium on bonds - Amortization of premium for 6 months in 2018

= $152,000 - ($19,200 * 6 / 12)

= $152,000- $9,600 = $142,400

Answer c

Carry value of the bonds at 12/31/19 :

Cash received on issue of bonds - Amortization of premium for 6 months in 2018 - Amortization of premium for the year 2019

= $3,952,000 - $9,600 - $19,200 = $3,923,200

ekkarill92 answered 1 year ago

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