Question

Sunset ​Drive-Ins Ltd. borrowed money by issuing $6,000,000 of 4​% bonds payable at 92.5 on July​ 1, 2018. The bonds are​ 10-year bonds and pay interest each January 1 and July 1.

1. How much cash did Sunset receive when it issued the bonds​ payable? Journalize this transaction.

2. How much must Sunset pay back at​ maturity? When is the maturity​ date?

3. How much cash interest will Sunset pay each six​ months?

4. How much interest expense will Sunset report each six​ months? Use the​ straight-line amortization method. Journalize the entries for the accrual of interest and amortization of discount on December​ 31, 2018​, and the payment of interest on January​ 1, 2019.

Answer 1

1	Cash received=6000000*92.5%=$ 5550000
	Journal enty:
	Date	Account titles				Debit	Credit
	July 1,2018.	Cash				5550000
		Discount on issue of bonds			(Plug)	450000
		Bonds payable					6000000
2	Pay back at​ maturity=$6000000
	Maturity date=Issue date+10 years=July 1,2018+10 years=July 1,2028
3	Cash interest=Face value*Coupon rate*(6/12)=6000000*4%*(6/12)=$ 120000
4	Interest expense=Discount to be amortized per semi-annual period+Cash interest
	Discount to be amortized per semi-annual period=Total discount/Number of semi annual interest periods
	Number of semi annual interest periods=Life of the bond*2=10*2=20
	Discount to be amortized per semi-annual period=450000/20=$ 22500
	Interest expense=22500+120000=$ 142500
	Journal enty:
	Date	Account titles				Debit	Credit
	Dec 31,2018	Interest expense				142500
		Discount on issue of bonds					22500
		Interest payable					120000
		(Interest due)
	Jan 1,2019	Interest payable				120000
		Cash					120000
		(Interest paid)