Question

On April 1, Year 1, Knights Products, Inc. issued at par $25 million of 10%, 10-year bonds payable. Interest is payable semiannually each April 1 and October 1.

INSTRUCTIONS:

(a) What is the amount of cash paid to bondholders for interest during Year 1?

(b) Give the adjusting (Journal) entry necessary at December 31, Year 1 (if any), regarding this bond issue.

(c) Interest expense on this bond issue reported in Olsen Products' Year 1 income statement is _____________________. Show working.

(d) With respect to this bond issue, Olsen Products' balance sheet at December 31, Year 1, includes bonds payable of $________ and interest payable of $________ (indicate $0 or "none" if the item is not reported. Explain your answer.

(e) Give the journal entry made by Olsen Products on April 1, Year 2, to record the semiannual payment of interest to bondholders.

Answer 1

A) Ans: $25 million of 10%

10 years bonds

10% interest semi-annually = 5%

and 5% * 100 = 0.05 semi-annually interest

= $25 million * 0.05

= $ 1.25 million paid during 1 year

B) Ans: December 31 Cash account Debit $25million

To Bonds Payble account Credit $25 million

C) Ans:   Income statement include an interest expenses equal to the bond's coupon payment minus the amortization portion of the premium received during the specified accounting period.

D) Ans: December 31 : Bonds Payble of $ 25 million   and Interest payble of $ 0.05%

E) Ans: April 1 : Cash account Debit $26.25 million

To bonds payble account Credit $25 million

To Interest payble account Credit $1.25 million