Need serve next to an accounting problem?
A company issues $20,000,000, 7.8%, 20-year bonds to relinquish 8% on January 1, 2006. Interest is compensated on June 30 and Dec. 31. The proceeds from the bonds are $19,604,145. What is interest expense for 2007, using straight-line amortization?
Answers:
I haven't done this for a long time. Could this be a "trick" problem? I would expense $1,560,000, because i.e. the amount of interest the company pays out. Sounds too simple !
Could they hold given too much information to see what we know, or am I lately amazingly rusty?
RONDA - Listen to Richie M - Makes sense to me. Like I said, I am outmoded and forgot too much. I better hold on to inactive!
The discount on the bond is 395,855 (20,000,000 - 19,604,145), and is to be amortized for 20 years. Therefore, the annual amortization of the bond is 19,792.75 (395,855/20).
The annual interest expense on the bond is 1,560,000 (20,000,000*7.8%).
The amortization of discount increases interest expense, that`s why, the total annual interest expense is 1,579,792.75 (1,560,000 + 19,792,.75).
Under the straight file method, the annual interest expense is equal for respectively year.
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Answers:
I haven't done this for a long time. Could this be a "trick" problem? I would expense $1,560,000, because i.e. the amount of interest the company pays out. Sounds too simple !
Could they hold given too much information to see what we know, or am I lately amazingly rusty?
RONDA - Listen to Richie M - Makes sense to me. Like I said, I am outmoded and forgot too much. I better hold on to inactive!
The discount on the bond is 395,855 (20,000,000 - 19,604,145), and is to be amortized for 20 years. Therefore, the annual amortization of the bond is 19,792.75 (395,855/20).
The annual interest expense on the bond is 1,560,000 (20,000,000*7.8%).
The amortization of discount increases interest expense, that`s why, the total annual interest expense is 1,579,792.75 (1,560,000 + 19,792,.75).
Under the straight file method, the annual interest expense is equal for respectively year.