Sunland Co. sold $1,940,000 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 Sunland 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.

The amount of interest expense to be reported is $186,240

Explanation:

In this question, we are asked to determine the amount of interest expense to be reported on July 1 and December 31, 2020

To determine this we proceed as follows;

Bonds issue price =

(face value of bonds issued / face value) * issue price

= (1940000/100) * 104

= $ 2017600

Premium on bonds = issue price - facevalue

= 2017600 - 1940000

= $ 77600

Straight line amortization per year = premium / no of years

= 77600/10

= $ 7760 per year

For semi annual period = 7760/2

= $ 3880

Semi annual cash payment of interest

= facevalue * cuponrate * (6/12)

= 1940000 * 10% * (6/12)

= $ 97000

Interest expense recorded on July 1 st

= Cash payment - amortization amount

= 97000 - 3880

= $ 93120

On Dec 31 st

= $ 93120 (remains same under straight line method)

Total interest expense for the year = 93120 * 2

= $ 186240