Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 10-8

ARNIE HOWELL CORPORATION

Partial Income Statement

For the Year Ended December 31, 2015

Other expenses and losses Interest expense

$9,486.68

ARNIE HOWELL CORPORATION

Partial Balance Sheet

December 31, 2015

Explanation: The interest expense is reported as an other expense near the bottom of a multiple-step income statement. The total expense incurred appears on the income statement; which in Arnie's case is the stated (cash) interest for the year plus the amortization of the discount for the year. On the balance sheet, interest for a full interest period ($7,000.00) appears under current liabilities because a cash payment of $7,000.00 is due to be made to bondholders on January 1, 2016, which is the day that follows the balance sheet date. This $7,000.00 results from accrued interest expense (that is, expense that has been incurred but has not yet been paid).

Bonds payable is classified in the long-term liabilities section of the balance sheet because the bonds are due at a date that is beyond one year of the balance sheet date. The balance of the Discount on Bonds Payable account appears as a contra liability item; thus, it is deducted from bonds payable on the balance sheet. In Arnie's situation, the $2,486.69 balance in the discount account at December 31, 2015, is the amount that relates to future interest periods (interest period 3 in this case). ...