Question

Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1, at 97. Glover’s year end is December 31. a. Were the bonds issued at a premium, a discount, or at par? b. Was the market rate of interest higher, lower, or the same as the contract rate of interest? c. If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? Round your answer to the nearest whole dollar. $ d. What is the carrying value of the bonds on December 31? Round your answer to the nearest whole dollar. $

Answer 1

Answer: This could be explained as below :-

Explanation:

A. Bonds were issued for $97 with par value of $100, hence they were issued on discount.

B. Market rate was higher, as company issued bonds on discount.

C. Amortization = $2,000,000 * 7.5% * 10/12 = $125,000

    Discount = $60,000/6 * 10/12 = $8,333

    Total interest expense = $125,000 + $8,333 = $133,333

D. Carrying value = $2,000,000 - $51,667 ($60,000 - $8,333) =$1,948,333