Question

E14-8 (Determine Proper Amounts in Account Balances) Presented below are three independent

situations.
(a) CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds:

(1) printing and engraving costs, $12,000; (2) legal fees, $49,000; and (3) commissions paid to under-
writer, $60,000. What amount should be reported as Unamortized Bond Issue Costs, and where

should this amount be reported on the balance sheet?
(b) George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2014. The bonds

were dated January 1, 2014, and pay interest on July 1 and January 1. If Gershwin uses the straight-
line method to amortize bond premium or discount, determine the amount of interest expense to be

reported on July 1, 2014, and December 31, 2014.
(c) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2014, for $562,500. This price
provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and
June 30. If Kenoly uses the effective-interest method, determine the amount of interest expense
to record if financial statements are issued on October 31, 2014.

Answer 1

In situation (a), the Unamortized Bond Issue Costs should be reported on the balance sheet. In situation (b), the interest expense on July 1, 2014, and December 31, 2014, will be $4,000. In situation (c), the amount of interest expense to record on October 31, 2014, will be $3,750.

Step-by-step explanation:

(a) Unamortized Bond Issue Costs should be reported on the balance sheet of CeCe Winans Corporation. The total amount of Unamortized Bond Issue Costs will be the sum of the printing and engraving costs, the legal fees, and the commissions paid to underwriter. In this case, the total Unamortized Bond Issue Costs will be $12,000 + $49,000 + $60,000 = $121,000.

(b) To determine the amount of interest expense, we need to calculate the bond premium or discount first. The bond was sold at 104, which means it was sold at a premium. The premium is the difference between the selling price and the face value of the bond. In this case, the premium is $2,000,000 x (104% - 100%) = $80,000. Since the bond has a 10-year term and interest is paid semiannually, the annual interest expense will be $80,000 / 10 = $8,000. Therefore, the interest expense on July 1, 2014, and December 31, 2014, will be $4,000.

(c) Ron Kenoly Inc. issued the bonds at a price that provided a yield of 10%, which means the bonds were sold at a discount. To calculate the amount of interest expense, we first need to calculate the bond discount. The bond discount is the difference between the face value of the bond and the selling price. In this case, the bond discount is $600,000 - $562,500 = $37,500. Since the bond has a 10-year term and interest is paid semiannually, the annual interest expense will be $37,500 / 10 = $3,750. Therefore, the amount of interest expense to record on October 31, 2014, will be $3,750.