Question

1. Cutler Inc. issued $20 million of 8 year 10% callable bonds dated July 1, 2018. The bonds were issued at 95. The bonds are callable at 10 Burroughs uses straight-line amortization. Record the following transactions.
   1. Record the issuance on July 1.
   2. Record the first payment of interest on December 31.
   3. Record the second payment of interest on June 30.
   4. Was the effective interest rate greater than, less than, or equal to 10%?
   5. Record the bonds called on July 1, 2019.

Answer 1

bond is issued at a discount of 5%

cash received on issue on Bond = 20 million *95% = $19 million

a) Cash $19 million

Discount on bond payable $1 million

Bond Payable $ 20 million

( Being Bond Issued at discount)

b) Interest Expense $2062500

Discount on bond Payable $62500

($1 million/16)

Cash $2000000

(Being 1st interest installment paid on 31st December. discount on bond issue is written off through straight line method. i.e, over 16 periods (8 years*2))

c)Interest Expense $2062500

Discount on bond Payable $62500

Cash $2000000

(Being 2nd interest installment paid on 30th June)

d) Since Bond was issued at a discount the effective interest rate is greater than coupon rate of 10%

e) Bond Payable $20 million

Loss on bond retirement $2.875 million

( Balancing figure)

  Discount on bond Payable $0.875 million

($1000000- 62500-62500)

Cash $22 million

(20*110%)

(Being bonds called at a premium of 10%.)