Question

George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2020. The bonds were dated January 1, 2020, 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, 2020, and December 31, 2020.

Answer 1

July 1, 2020 $96,000

December 31, 2020 $96,000

Step-by-step explanation:

Calculation to determine the amount of interest expense to be reported on July 1, 2020, and December 31, 2020.

Firststep is to get calculate the Premium amortization (Straight-line)

Issue price of the bonds $2,080,000

($2,000,000 x 1.04)

Less Par value of bonds ($2,000,000)

Premium on bonds payable $80,000

÷ Numbet of interest payments 20 times

(10 years x 2 times)

= Premium amortization (Straight-line) $4,000

($80,000÷20 times)

Now let calculate the Interest expense

Interest payment $100,000

(2,000,000 x 10% x 6/12)

Less Premium amortization ($4,000)

Interest expense $96,000

($100,000-$4,000)

Hence,using the straight line method, Interest expense will be $96,000 for every time.

Therefore the amount of interest expense to be reported on July 1, 2020 is $96,000, and December 31, 2020 is $96,000