[The following information applies to questions 3-6 displayed below.] Kruse Corporation holds 60 percent of the voting...

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[The following informationapplies to questions 3-6 displayed below.]
Kruse Corporation holds 60 percent of the voting common sharesof Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased$50,000 par value, 10 percent first mortgage bonds of Kruse fromCane for $58,000. Kruse originally issued the bonds to Cane onJanuary 1, 20X4, for $53,000 (assuming a market interest rate of9.074505%). The bonds have a 10-year maturity from the date ofissue and pay interest semiannually on June 30th and December31st.
Gary’s reported net income of $20,000 for20X6, and Kruse reported income (excluding income from ownership ofGary’s stock) of $40,000.

3.
What amount of interest expense does Kruse record for 20X6?(Do not round your intermediate calculations. Round yourfinal answer to nearest whole dollar)
$4,805.
$4,756.
$4,767.
$4,777.

Answer & Explanation Solved by verified expert

3.8 Ratings (566 Votes)

	Annual effective interest		Half yearly effective interest
	9.074505		4.537253



	flows			Actual Interest
01-01-20X4	53000	1	53000
01-06-20X4	-2500	0.95659679	-2391.49	2404.744
31-12-20X4	-2500	0.91507742	-2287.69	2404.744
01-06-20X5	-2500	0.87536012	-2188.4	2404.744
31-12-20X5	-2500	0.83736668	-2093.42	2404.744
01-06-20X6	-2500	0.80102227	-2002.56	2404.744
31-12-20X6	-2500	0.76625533	-1915.64	2404.744
	-2500	0.73299739	-1832.49
	-2500	0.70118295	-1752.96
	-2500	0.67074936	-1676.87
	-2500	0.64163668	-1604.09
	-2500	0.61378759	-1534.47
	-2500	0.58714724	-1467.87
	-2500	0.56166316	-1404.16
	-2500	0.53728518	-1343.21
	-2500	0.51396527	-1284.91
	-2500	0.49165753	-1229.14
	-2500	0.47031801	-1175.8
	-2500	0.4499047	-1124.76
	-2500	0.43037739	-1075.94
	-2500	0.41169763	-1029.24
	-50000	0.41169763	-20584.9
	Total flows		0

Premium on bonds		Debit	190.51
Interest expense		Debit	4809.49
	Cash		Credit	5000

The correct option is		1	4805
So, interest expense will be			4809.49
Difference due to round off			4.49

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Transcribed Image Text

[The following informationapplies to questions 3-6 displayed below.]Kruse Corporation holds 60 percent of the voting common sharesof Gary’s Ice Cream Parlors. On January 1, 20X6, Gary’s purchased$50,000 par value, 10 percent first mortgage bonds of Kruse fromCane for $58,000. Kruse originally issued the bonds to Cane onJanuary 1, 20X4, for $53,000 (assuming a market interest rate of9.074505%). The bonds have a 10-year maturity from the date ofissue and pay interest semiannually on June 30th and December31st. Gary’s reported net income of $20,000 for20X6, and Kruse reported income (excluding income from ownership ofGary’s stock) of $40,000. 3.What amount of interest expense does Kruse record for 20X6?(Do not round your intermediate calculations. Round yourfinal answer to nearest whole dollar)$4,805.$4,756.$4,767.$4,777.