Problem 7-36 Straight-line amortization of a bond discount LO 7-8 During 2014 an
ID: 2427827 • Letter: P
Question
Problem 7-36 Straight-line amortization of a bond discount LO 7-8 During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31.
2014
Mar. 1 Issued $300,000 of ten-year, 7 percent bonds for $285,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.
Sept. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31 Recognized accrued interest expense including the amortization of the discount.
2015
Mar. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Sept. 1 Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31 Recognized accrued interest expense including the amortization of the discount.
Explanation / Answer
Discount on issue of bonds = $300,000 - $285,000 = $15,000
Per payment discount on bonds = $15,000*1/ 10*6 / 12 = $750
a. Liabilities section of the bond 2014 2015
Interest expense payable $7,000 $7,000 (300,000 * .07 * 4/12)
Bonds payable $300,000-$13,750 $300,000-$12,250
$286,250 $287,750
b. Interest expense
Bonds payable amortized ($750 +$500) ($250+$750+$500)
$1,250 $1,500
interest (300,000 *.07*10/12) $17,500 $21,000(300,000*.07*12/12)
Total interest expense $18,750 $22,500
c. Amount of interest paid= interest - interest expense payable at end + interest expense payable at beginning
Interest expense $17,500-$7,000+0= $10,500 $21,000 - $7,000 +$7,000=$21,000