Question

Tree Top Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America.​ Additionally, the company wants to add another building on their land to offer more services for local customers.

Tree TopCompany plans to raise the capital by issuing $1,400,000 of 7​%,seven​-year bonds on January​ 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives $1,398,320 when the bonds are issued. The company also issues a mortgage payable for $400,000 on January​ 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $20,000 plus interest for twentyyears, payable on December 31. The mortgage interest rate is 8​%.

Requirement 1. Will the bonds issue at face​ value, a​ premium, or a​ discount?

Tree Top​'sbonds will be issued at a discount because

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Requirement 2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations. ​(Round your answers to the nearest whole dollar. Record debits​ first, then credits. Exclude explanations from any journal​ entries.)

a. Cash received from the bond issue.

Date	Accounts	Debit	Credit
2020
Jan. 2	Cash
	Discount on Bonds Payable
	Bonds Payable

b. Cash received from the mortgage payable.

Date	Accounts	Debit	Credit
2020
Jan. 2	Cash	400000
	Mortgages Payable

c. Semiannual bond interest payments for 2020.Amortize the premium or discount using the​ straight-line amortization method. Start by recording the semiannual bond interest payment on June​ 30,2020.

Date	Accounts	Debit	Credit
2020
Jun. 30	Interest Expense
	Cash
	Discount on Bonds Payable

Now record the semiannual bond interest payment on December​ 31, 2020.

Date	Accounts	Debit	Credit
2020
Dec. 31

d. Payment on the mortgage payable for2020.

Date	Accounts	Debit	Credit
2020
Dec. 31

Requirement 3. Calculate the total interest expense incurred in 2020.

	Total 2020
	Interest Expense
Bonds
Mortgage
Total

Answer 1

Requirement 1. Will the bonds issue at face​ value, a​ premium, or a​ discount?
Tree Top​'sbonds will be issued at a discount because market interest rate exceeds the coupon rate of the bond
Requirement 2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations. ​(Round your answers to the nearest whole dollar. Record debits​ first, then credits. Exclude explanations from any journal​ entries.)
a. Cash received from the bond issue.
Date	Accounts	Debit	Credit
Jan 2,2020
	Cash	$ 1,398,320.00
	Discount on Bonds Payable	$        1,680.00
	Bonds Payable		$ 1,400,000.00
b. Cash received from the mortgage payable.
Date	Accounts	Debit	Credit
Jan 2,2020	Cash	$    400,000.00
	Mortgages Payable		$    400,000.00
c. Semiannual bond interest payments for 2020.Amortize the premium or discount using the​ straight-line amortization method. Start by recording the semiannual bond interest payment on June​ 30,2020.
Date	Accounts	Debit	Credit
Jun. 30 2020
	Interest Expense	$      49,120.00
	Cash (1400000 x 7%/2)		$      49,000.00
	Discount on Bonds Payable (1680/(7 years x 2)		$           120.00
Now record the semiannual bond interest payment on December​ 31, 2020.
Date	Accounts	Debit	Credit
Dec. 31 2020	Interest Expense	$      49,120.00
	Cash (1400000 x 7%/2)		$      49,000.00
	Discount on Bonds Payable (1680/(7 years x 2)		$           120.00
d. Payment on the mortgage payable for2020.
Date	Accounts	Debit	Credit
Dec. 31 2020	Interest Expenses (400000 x 8% )	32000
	Mortgages Payable	20000
	Cash		52000
Requirement 3. Calculate the total interest expense incurred in 2020.
	Total 2020
	Interest Expense
Bonds	$                                                                      98,240.00
Mortgage	$                                                                      32,000.00
Total	$                                                                    130,240.00