(a) Novak Co. sold $2,080,000 of 12%, 10-year bonds at 105 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Novak uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2020, and December 31, 2020. (Round answer to 0 decimal places, e.g. 38,548.)Interest expense to be recorded$ ?

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Asked Aug 30, 2019
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(a) Novak Co. sold $2,080,000 of 12%, 10-year bonds at 105 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1. If Novak 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. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be recorded

$ ?

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Expert Answer

Step 1

Bond discount is the amount by which the selling price (or issue price or market price) of the bond is lower than the face value of the bond. Bond premium is the amount by which the selling price (or issue price or market price) of the bond is more than the face value of the bond.

In the given case, Corporation N has sold $2,080,000 (face value) bonds for $2,184,000, 105% of $2,080,000 (issue price). Since the issue price is more than the face value, the bonds are issued at a premium. The process of allocation and reduction of the discount or premium on bonds to interest expense over the life of bonds is referred to as amortization of bonds.

Step 2

Compute interest payable.

Interest payable =Face valuexFace interest ratex Interest time period
12
Interest payable = S2,080,000x,
6
100 12
= S124,800
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Interest payable =Face valuexFace interest ratex Interest time period 12 Interest payable = S2,080,000x, 6 100 12 = S124,800

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Step 3

Compute the bond...

Face value of bonds
Premium on
- Face value of bonds
bonds payable
x Premium price percentage
S2,080, 00005$2,080,000
100
S2,184,000-S2, 080, 000
=S104,000
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Face value of bonds Premium on - Face value of bonds bonds payable x Premium price percentage S2,080, 00005$2,080,000 100 S2,184,000-S2, 080, 000 =S104,000

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