Question

On July 1, 2020 Garcia Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 96. Interest is paid on Jan 1 and July 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2020 income statement of Garcia Corporation would be

Answer 1

Garcia Corporation

Bond interest expense reported on the December 31 2020 income statement of Garcia Corporation would be:

= $216,000.

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued = $8,000,000

Issue price at 96 = 7,680,000 (96% * $8,000,000)

Discount on bonds = $320,000

Coupon rate of interest = 5% or 2.5% semi-annually

Maturity period = 10 years

Period of bonds = 20 (10 * 2)

Interest payment = Jan 1 and July 1 (semi-annually)

Amortized semi-annual discounts = $16,000 ($320,000/20)

Interest payment = $200,000 ($8,000,000 * 2.5%)

Interest expense = $216,000 ($200,000 + $16,000)

Analysis on December 31, 2020:

Interest expense $216,000

Interest payable $200,000

Amortized discounts $16,000