Question
In: Accounting
38) Trent Corp. issued $800,000 of 8%, 5-year bonds at 102 on January 1, 2017. The...
38) Trent Corp. issued $800,000 of 8%, 5-year bonds at 102 on January 1, 2017. The straight-line method of amortization is used and the bonds pay interest annually on January 1. The amount of bond interest expense that Trent should report on its December 31, 2017, income statement is
Select one:
a. $60,800.
b. $67,200.
c. $65,280.
d. $64,000.
Solutions
Expert Solution
Correct answer----$60,800
Bonds are issued at Premium. The amount of interest expense will be cash paid for interest minus premium to be amortized in the year using Straight line method.
| Period | Cash payment (Credit) | Interest Expense (Debit) | Discount on bond | Premium on bond balance | Bonds payable Carrying Value |
| At issue | $ 16,000 | $ 8,16,000 | |||
| Year 2017 end | $ 64,000 | $ 60,800 | $ 3,200 | $ 12,800 | $ 8,12,800 |
| Year 2018 end | $ 64,000 | $ 60,800 | $ 3,200 | $ 9,600 | $ 8,09,600 |
| Year 2019 end | $ 64,000 | $ 60,800 | $ 3,200 | $ 6,400 | $ 8,06,400 |
| Year 2020 end | $ 64,000 | $ 60,800 | $ 3,200 | $ 3,200 | $ 8,03,200 |
| Year 2021 end | $ 64,000 | $ 60,800 | $ 3,200 | $ - | $ 8,00,000 |
Year 2017 interest expense = $64000-3200=$60800
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