Question
In: Accounting
[The following information applies to questions 3-6 displayed below.] Kruse Corporation holds 60 percent of the...
| [The following information applies to questions 3-6 displayed below.] |
|
Kruse Corporation holds 60 percent of the voting common shares of Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased $50,000 par value, 10 percent first mortgage bonds of Kruse from Cane for $58,000. Kruse originally issued the bonds to Cane on January 1, 20X4, for $53,000 (assuming a market interest rate of 9.074505%). The bonds have a 10-year maturity from the date of issue and pay interest semiannually on June 30th and December 31st. |
|
Gary’s reported net income of $20,000 for 20X6, and Kruse reported income (excluding income from ownership of Gary’s stock) of $40,000. |
| 3. |
What amount of interest expense does Kruse record for 20X6? (Do not round your intermediate calculations. Round your final answer to nearest whole dollar) |
$4,805.
$4,756.
$4,767.
$4,777.
Solutions
Expert Solution
| Annual effective interest | Half yearly effective interest | |||
| 9.074505 | 4.537253 | |||
| flows | Actual Interest | |||
| 01-01-20X4 | 53000 | 1 | 53000 | |
| 01-06-20X4 | -2500 | 0.95659679 | -2391.49 | 2404.744 |
| 31-12-20X4 | -2500 | 0.91507742 | -2287.69 | 2404.744 |
| 01-06-20X5 | -2500 | 0.87536012 | -2188.4 | 2404.744 |
| 31-12-20X5 | -2500 | 0.83736668 | -2093.42 | 2404.744 |
| 01-06-20X6 | -2500 | 0.80102227 | -2002.56 | 2404.744 |
| 31-12-20X6 | -2500 | 0.76625533 | -1915.64 | 2404.744 |
| -2500 | 0.73299739 | -1832.49 | ||
| -2500 | 0.70118295 | -1752.96 | ||
| -2500 | 0.67074936 | -1676.87 | ||
| -2500 | 0.64163668 | -1604.09 | ||
| -2500 | 0.61378759 | -1534.47 | ||
| -2500 | 0.58714724 | -1467.87 | ||
| -2500 | 0.56166316 | -1404.16 | ||
| -2500 | 0.53728518 | -1343.21 | ||
| -2500 | 0.51396527 | -1284.91 | ||
| -2500 | 0.49165753 | -1229.14 | ||
| -2500 | 0.47031801 | -1175.8 | ||
| -2500 | 0.4499047 | -1124.76 | ||
| -2500 | 0.43037739 | -1075.94 | ||
| -2500 | 0.41169763 | -1029.24 | ||
| -50000 | 0.41169763 | -20584.9 | ||
| Total flows | 0 | |||
| Premium on bonds | Debit | 190.51 | ||
| Interest expense | Debit | 4809.49 | ||
| Cash | Credit | 5000 | ||
| The correct option is | 1 | 4805 | ||
| So, interest expense will be | 4809.49 | |||
| Difference due to round off | 4.49 | |||
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