Question

XY Corporation sold $150,000 three year 8% (payable 4% semiannually) bonds dated March 1, 20X1, for...

XY Corporation sold $150,000 three year 8% (payable 4% semiannually) bonds dated March 1, 20X1, for $156,400 plus accrued interest. Interest is payable each February 28 and August 31. The bonds were sold July 1, 20X1. XY has a year-end of December 31 and uses the straight-line method of amortizing all bond discounts or premiums.
3. How much would XY record for interest expense in 20X1 relating to this bond issue?
a. $4,800
b $1,200
c. $7,200
d. $2,000
e. $2,40

4. How much cash was received for the bond sale on July 1, 20X1?
a. $156,400
b. $164,400
c. $150,000
d. $160,400
e. $164,000

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Homework Answers

Answer #1

Part 1, Question 3)a. $4,800

Explanation:

Interest Expense for 20x1=Interest Expense of coupon payments - Amortization of premium

Interest Expense of coupon payments for 6 months from July to December=150000*8%*6/12=6000

Amortization of premium of 6 months (to be now done in 32 months from July 20x1 to maturity date of March 1, 20x4)=(156400-150000)*6/32=1200

Interest Expense=6000-1200=$4,800

Part 2, Question 4)d, 160,400

Explanation:

Cash received=Issue price+Accrued Interest

Issue price=156400

Accrued Interest (on 150000@8% for 4 months from march to june)=150000*8%*4/12=4,000

Cash Received=156400+4000=$160,400

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