Question

# The Company sold \$2,500,000 of 8 percent, five-year bonds on January 1, 2011, and would pay...

The Company sold \$2,500,000 of 8 percent, five-year bonds on January 1, 2011, and would pay interest semiannually, on June 30 and December 31 of each of the five years. It sold the bonds on January 1, 2011, at 96 because the market rate of interest for similar investments was 9 percent. It decided to amortize the bond discount by using the effective interest method.

15. With regard to the bond issue on January 1, 2011, how much cash is received?

16. With regard to the bond issue on January 1, 2011, how much is bond discount?

17. With regard to the bond interest payment on December 31, 2011, how much cash is paid in interest?

18. With regard to the bond interest payment on December 31, 2011, how much is the amortization?

19. With regard to the bond interest payment on December 31, 2011, how much is interest expense?

15. Cash received = 2,500,000 *96 /100 = 2,400,000

16. Bond discount = 2,500,000- 2,400,000 = 100,000

17. Cash paid in interest = 2,500,000 *8% *1/2 = 100,000

18. Amortization on Dec 31,2011 = 8360

19. Interest expense on Dec 31,2011 = 108360

Workings:

 Semiannual interest payment date Carrying value at beginning of period Semiannual interest expense [Carrying value *9%*1/2] Semiannual interest payment [2,500,000*8%*1/2] Amortization of discount [Interest expense - Interest payment] Unamortized bond discount at the end of period Carrying value at end of period Jan 1,2011 100000.00 2400000 June 30,2011 2400000 108000 100000 8000 92000.00 2408000 Dec 31,2011 2408000 108360 100000 8360 83640.00 2416360

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