Question

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.)

Answer 1

Answer to Question 1:

Face Value = $61,000

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

Answer to Question 2:

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)