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18 September, 08:11

Sunland Co. sold $1,940,000 of 10%, 10-year bonds at 104 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Sunland uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1 2020, and December 31, 2020.

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  1. 18 September, 10:12
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    The amount of interest expense to be reported is $186,240

    Explanation:

    In this question, we are asked to determine the amount of interest expense to be reported on July 1 and December 31, 2020

    To determine this we proceed as follows;

    Bonds issue price =

    (face value of bonds issued / face value) * issue price

    = (1940000/100) * 104

    = $ 2017600

    Premium on bonds = issue price - facevalue

    = 2017600 - 1940000

    = $ 77600

    Straight line amortization per year = premium / no of years

    = 77600/10

    = $ 7760 per year

    For semi annual period = 7760/2

    = $ 3880

    Semi annual cash payment of interest

    = facevalue * cuponrate * (6/12)

    = 1940000 * 10% * (6/12)

    = $ 97000

    Interest expense recorded on July 1 st

    = Cash payment - amortization amount

    = 97000 - 3880

    = $ 93120

    On Dec 31 st

    = $ 93120 (remains same under straight line method)

    Total interest expense for the year = 93120 * 2

    = $ 186240
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