Question

On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.
1) The amount of cash paid to bondholders for interest during year 1, is:________.
a) 6,6000,000
b) 5,400,000
c) 3, 600,000
d) 1,800,00
2) Interest expense on this bond issue reported in Criket's Year 1, income statement is:______________.
a) 2,400,000
b) 4,800,000
c) 5,400,000
d) 7,200,000

Answer 1

Answer:

1. c) 3, 600,000

2. c) 5,400,000

Explanation:

1. Calculation to determine The amount of cash paid to bondholders for interest during year 1

Interest paid to bondholders for Interest during year 1 = $60,000,000 * 12% * 6/12

Interest paid to bondholders for Interest during year 1 = $3,600,000

Therefore The amount of cash paid to bondholders for interest during year is $3,600,000

2. Calculation to determine the Interest expense on the bond issue reported in criket's year 1, income statement

Using this formula

Interest expense = 1st October interest paid + 31st December accrued interest

Let plug in the formula

Interest expense = $3,600,000 + ($60,000,000 * 12% * 3/12)

Interest expense =$3,600,000+$1,800,000

Interest expense= $5,400,000

Therefore

The amount of cash paid to bondholders for interest during year 1, is $5,400,000