Question

# Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of \$61,000 for \$61,000 on January...

Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of \$61,000 for \$61,000 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31.

1. & 2. Record the bond issue and first interest payment on June 30, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

On January 1, 2018, Lyle's Limeade issues 3%, 20-year bonds with a face amount of \$80,000 for \$69,058, priced to yield 4%. Interest is paid semiannually.

What amount of interest expense will be recorded in the December 31, 2018, annual income statement? (Do not round intermediate calculations.)

Face Value = \$61,000

Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * \$61,000
Semiannual Coupon = \$2,135

Face Value = \$80,000
Issue Price = \$69,058

Annual Coupon Rate = 3%
Semiannual Coupon Rate = 1.50%
Semiannual Coupon = 1.50% * \$80,000
Semiannual Coupon = \$1,200

Annual Interest Rate = 4%
Semiannual Interest Rate = 2%

June 30, 2018:

Interest Expense = 2% * \$69,058
Interest Expense = \$1,381

Amortization of Discount = \$1,381 - \$1,200
Amortization of Discount = \$181

December 31, 2018:

Carrying Value = \$69,058 + \$181
Carrying Value = \$69,239

Interest Expense = 2% * \$69,239
Interest Expense = \$1,385

Interest Expense recorded in Income Statement is \$2,766 (\$1,381 + \$1,385)