Question

On January 1, 2010 Ryan Corporation issued bonds with a face value of $5,000,000 and a coupon rate of 5% for $4,670,865. The effective rate on the bonds is 6%. The bonds pay interest each January 1 and July 1 and mature on July 1, 2018.
The company uses effective rate amortization method.
6. The journal entry (and amount) to recognize the interest expense on December 31, 2010 would be:
a. Debit Interest Expense [$140,126]; Credit Bonds Payable [$15,126]; Credit Cash [$125,000].
b. Debit Interest Expense [$140,580]; Credit Bonds Payable [$15,580]; Credit Interest Payable [$125,000].
c. Debit Interest Expense [$150,000]; Credit Bonds Payable [$25,000]; Interest Payable [$125,000].
d. Debit Interest Expense [$140,126]; Credit Cash [$125,000]; Credit Bonds Payable [$15,126].
e. None of the above but: .
7. On December 31, 2011, the total amount for bonds payable reported by Ryan on its Balance sheet would be:
a. Long-term Liability: Bonds Payable [$5,000,000].
b. Long-term Liability: Bonds Payable [$4,734,147].
c. Long-term Liability: Bonds Payable [$4,717,618].
d. Long-term Liability: Bonds Payable [$4,751,171].
e. None of the above but: $ .

Answer 1

6

The journal entry (and amount) to recognize the interest expense on December 31, 2010 would be:

Debit Interest Expense [$140,580]; Credit Bonds Payable [$15,580]; Credit Interest Payable [$125,000].

Option B is correct

7

Long-term Liability: Bonds Payable [$4,734,147].

Option B is correct

Workings:
Date	Cash interest	Interest expense	Discount amortized	Carrying value
January 1, 2010				4670865
July 1, 2010	125000	140126	15126	4685991
Dec 31,2010	125000	140580	15580	4701571
July 1, 2011	125000	141047	16047	4717618
Dec 31,2011	125000	141529	16529	4734147
Cash interest	125000	=5000000*5%*6/12
Interest expense:
July 1, 2010	140126	=4670865*6%*6/12
Dec 31,2010	140580	=4685991*6%*6/12
July 1, 2011	141047	=4701571*6%*6/12
Dec 31,2011	141529	=4717618*6%*6/12