Question

On July 1, 2020, when the market rate of interest was 12%, TTS Corporation issued $100,000 of 10%, 10 year bonds, interest payable June 30 and December 31. The bonds were issued at 93. TTS’s fiscal year ends December 31. What is the amount of cash interest paid on December 31, 2020? Select one: a. $10,000 b. None of the above c. $5,000 d. $6,000 e. $12,000

Answer 1

Answer:

E) $12,000

Explanation:

the bonds were  issued at a discount for $93,000

the face value $100,0000

coupon rate 12%

even though the bonds were sold at a discount because the coupon rate was lower than the market rate,  the amount of cash paid as interest is based on the face value = $100,0000 x 12% = $12,000

the journal  entry to record the sale of the bonds would be:

Dr Cash 93,000

Dr Discount on bonds payable 7,000

    Cr Bonds payable 100,000

whatever method the company uses  to record interest, the amount of cash paid will  always be the same