Question

Bonds payable—record issuance and premium amortization Jessie Co. issued $2 million face amount of 7%, 20-year bonds on April 1, 2016. The bonds pay interest on an annual basis on March 31 each year.
a. Assume that market interest rates were slightly lower than 7% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain.
b. Independent of your answer to part , assume that the proceeds were $2,060,000. Use the horizontal model (or write the journal entry) to show the effect of issuing the bonds.
c.Calculate the interest expense that Jessie Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2016, assuming that the premium of $60,000 is amortized on a straight-line basis.

Answer 1

Answer:

Explanation:

a. If the market rates are lower than 7% stated bond interest rate, bond can be sold at premium. Market interest rates are lesser but present value cash flows from bonds are higher. That is why people will be willing to pay higher price for the bond in order to get a bond with high coupon rates.

b.

Dr Cash 2,060,000

Cr Bonds payable 2,000,000

Cr Premium on bonds payable 60,000

c. Accrued interest = Face value*Coupon rate*Period of interest/12 = 2,000,000*7%*6/12 = 70,000

Premium amortization = 60,000/20*6/12 = 1,500

Dr Interest expense 70,000

Dr Premium on bonds payable 1500

Cr Interest payable 71,500