Presented below are three independent situations a Sheridan

Presented below are three independent situations.

(a) Sheridan Co. sold $1,830,000 of 10%, 10-year bonds at 106 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Sheridan uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017. (Round answer to 0 decimal places, e.g. 38,548.)

(b) Skysong Inc. issued $550,000 of 9%, 10-year bonds on June 30, 2017, for $515,729. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Skysong uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Interest Expense to be Recorded $

Solution

Solution

Determination of the amount of interest expense to be reported on July 1, 2017 and December 31, 2017:

Given information,

Bond value      $1,830,000

Period             10 years

Rate of interest           10%

Date of issue January 1, 2017

The bonds are issued at $106

So, premium on bonds = ($1,830,000 x 106/100) - $1,830,000 = $109,800

Since interest is paid twice a year, period = 10 years x 2 = 20

Since, interest is paid semi annually, the amount of premium to be amortized for each 6-month period = $109,800/20 =$5,490

Interest as on July 1, 2017 – 6 months

= $1,830,000 x 10% x 6/12 =$91,500

Less: amortization of premium          $5,490

Hence interest expense as of July 1, 2017 = $86,010

The interest expense as if December 31, 2017 = $86,010

Hence, interest expense to be recorded = $86,010

Determination of the interest expense to be recorded:

Value of bonds issued on June 30, 2017        $515,729

Effective interest rate for the period June 30 – October 31, 2017,

Since bonds provide yield of 10%, effective interest rate = 10% x4/12 = 0.033333

Interest expense to be recorded as on October 31, 2017       = $515,729 x 0.033333 = $17,191

Hence, the amount of interest expense to be recorded on October 31, 2017 = $17,191