Question

1a. Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of $67,000 for $67,000 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31.

Required:

1. & 2. Record the bond issue and first interest payment on June 30, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

1b. Presented below is a partial amortization schedule for Premium Pizza.

(1)		(2)				(3)				(4)				(5)
Period		Cash Paid for Interest				Interest Expense				Decrease in Carrying Value				Carrying Value
Issue date														$	71,144
1		$	1,980			$	1,779			$	201				70,943
2			1,980				1,774				206				70,737

Required:

1. & 2. Record the bond issue and first interest payment assuming the face amount of bonds payable is $66,000.(If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

1c. Interest expense decreases each period because the carrying value of the debt issued at a premium decreases over time. Is this TRUE or FALSE?

1d. On January 1, 2021, Lizzy's Lemonade issues 6%, 10-year bonds with a face amount of $95,000 for $88,249, priced to yield 7%. Interest is paid semiannually.

What amount of interest expense will be recorded on June 30, 2021, the first interest payment date? (Round your final answer to the nearest whole dollar amount.)

Answer 1

Solution

1a. Pretzelmania Inc

1&2. Entry to record bond issue and first interest payment on June 30, 2021:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Cash	$67,000
	Bonds Payable	$67,000
	(To record bond issue at par)
June 30, 2021	Interest Expense	$2,345
	Cash		$2,345
	(To record interest expense and cash payment)

1b. Premium Pizza

1&2. Entry to record bond issue and first interest payment:

Date	Account Titles and Explanation	Debit	Credit
Issue Date	Cash	$71,144
	Bonds Payable	$66,000
	Premium on Bonds Payable	$5,144
	(To record bond issue and premium; 71,144 - 66,000 = 5,144)
Interest payment date	Interest Expense	$1,779
	Premium on Bonds Payable	$201
	Cash		$1,980
	(To record interest expense, premium amortization and cash payment)

1c. True

Interest expense decreases each period because the carrying value of the debt issued at a premium decreases over time.

Explanation:

When debt issued is at premium, the cash received will be higher than the face value.

With each cash payment on interest date, the premium is amortized and the carrying value is decreased with the premium amortized.

Interest is computed on the carrying value at the beginning of the period.

Hence, when the carrying value decreases, the interest also decreases.

1d. Lizzy’s Lemonade

interest expense to be recorded on June 30, 2021:

interest expense is computed on the carrying value of bond.

Carrying value of bond = $88,249

Market yield rate = 7%

Effective rate for semi-annual interest payment = 7% x 6/12 = 3.5%

Interest expense on June 30, 2021 = 88,249 x 3.5% = $3,089