During 2018 and 2019, Kale Co. completed the following transactions relating to

Question

During 2018 and 2019, Kale Co. completed the following transactions relating to its bond issue. The company’s fiscal year ends on December 31

2018

2019

Required

.

When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Kale Co. have received?

Prepare the liabilities section of the balance sheet at December 31, 2018 and 2019.

Determine the amount of interest expense Kale would report on the income statements for 2018 and 2019.

Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019.

A

B

C&D

Mar. 1 Issued $200,000 of 8 year, 6 percent bonds for $194,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2018. 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. Was the market rate of interest than the stated rate of interest. Cash received

Explanation / Answer

When the bonds were issued, the market rate of interest was more than the stated rate of interest because the bond is issued at a discount.

If the bonds had sold at face value, amount of cash Kale Co. would have received will be $200,000.

Amount of interest expense Kale would report on the income statements for 2018 and 2019 is

2018 $10,625

2019 $12,750

Amount of interest Kale would pay to the bondholders in 2018 and 2019.

2018 $6,000

2019 $12,000

Liabilities section of the balance sheet at December 31, 2018 and 2019 is:

KALE CO. Balance Sheet (Partial) Long term liabilities: 2018 2019 6% Bonds paayble 200,000 200,000 Less: Unamortized Bond Discount 5,375 $4,625 194,625 $195,375

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