Question

3. Burroughs 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 101. Burroughs uses straight-line amortization. Record the following transactions. a. Record the issuance on July 1. b. Record the first payment of interest on December 31. c. Record the second payment of interest on June 30. d. Was the effective interest rate greater than, less than, or equal to 10%? e. Record the bonds called on July 1, 2019.

Answer 1

Transactions are as recorded below:

	Year	Particulars	L.F	Debit ($)	Credit ($)
	2018
a	Jul-01	Cash (20,000,000*.95)		19,000,000
		Discount on Bonds Payable		1,000,000
		Bonds Payable			20,000,000
		(For bonds issued)
b	Dec-31	Interest Expense		1,062,500
		Discount on Bonds Payable (1,000,000/16)			62,500
		Cash (20,000,000*10%*6/12)			1,000,000
		(For interest paid)
c	Jun-30	Interest Expense		1,062,500
		Discount on Bonds Payable (1,000,000/16)			62,500
		Cash (20,000,000*10%*6/12)			1,000,000
		(For interest paid)
d		Effective interest rate is greater than 10%
	2019
e	Jul-01	Interest Expense		1,062,500
		Discount on Bonds Payable (1,000,000/16)			62,500
		Cash (20,000,000*10%*6/12)			1,000,000
		(For interest paid)
	Jul-01	Bonds Payable		20,000,000
		Loss on redemption of bonds		1,012,500
		Discount on Bonds Payable			812,500
		Cash (20,000,000*1.01)			20,200,000
		(For bonds called)