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Chapter 12: Q5SE_1 (page 656)

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payableat 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

Short Answer

Expert verified

Answer:

The amount received by Savvy on the issue is $3,482,500.

Step by step solution

01

Definition of interest

Interest is the amount paid by the company to the investors or creditors againstusing their money for given period.

02

Amount receive on the issue of bonds

In this, bonds are issued at a discount

PriceofBonds=Facevalueofbond×rate=$3,500,000×99.50%=$3,482,500

Hence, the cash received by Savvy when it issued money is $3,482,500.

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Most popular questions from this chapter

Journalizing bond transactions

Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on

January 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest on July 1, 2018.

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodRelaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018,when the market interest rate is 12%, the company issues $300,000 of the bonds. Thebonds pay interest semiannually.

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1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Why would a company choose to issue bonds instead of issuing stock?

Accounting for a long-term note payable

On January 1, 2018, Lakeman-Fay signed a \(1,500,000, 15-year, 7% note. The loan

required Lakeman-Fay to make annual payments on December 31 of \)100,000

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1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first note payment on December 31, 2018.

Determining bond prices and interest expense

Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to

borrow for a major expansion. The owner, Shane Jones, asks your advice on some

related matters.

Requirements

1. Answer the following questions:

a. At what type of bond price Jones Company will have total interest expense

equal to the cash interest payments?

b. Under which type of bond price will Jones Company’s total interest expense be

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c. If the market interest rate is 12%, what type of bond price can Jones Company

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2. Compute the price of the bonds if the bonds are issued at 89.

3. How much will Jones Company pay in interest each year? How much will Jones

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