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(Solved): Question 7 During 2018 And 2019, Kale Co. Completed The Following Transactions Relating To Its Bond ...

question 7

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

Mar. 1 Issued $390,000 of 10 year, 6 percent bonds for $378,000. 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.

2019

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.

Required

  1. 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?
  2. Prepare the liabilities section of the balance sheet at December 31, 2018 and 2019.
  3. Determine the amount of interest expense Kale would report on the income statements for 2018 and 2019.
  4. Determine the amount of interest Kale would pay to the bondholders in 2018 and 2019.
KALE CO.
Balance Sheet (Partial)
As of December 31
2018 2019
Liabilities
Interest payable not attempted not attempted
Bonds payable not attempted not attempted
Less: Discount on bonds payable not attempted not attempted
Carrying value of bonds payable
Total liabilities
2018 2019
C. Interest expense not attempted not attempted
D. Interest paid not attempted not attempted


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Expert Answer

a. The market rate of interest was more than the stated rate of interest, as the bonds were issued at a discount.
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