The Smart Company sold $500,000 of 8 percent, 20-year bonds on April 1, 2011, at

Question

The Smart Company sold $500,000 of 8 percent, 20-year bonds on April 1, 2011, at 105. The semiannual interest payment dates are March 31 and September 30. The market interest rate is 7.5 percent. The company's fiscal year ends September 30. Use the effective interest method to calculate the amortization.

1a. With regard to the bond issue on April 1, 2011, how much cash is received
1b. With regard to the bond issue on April 1, 2011, how much is Bonds Payable?
How much is it?
2a. With regard to the bond interest payment on September 30, 2011, how much cash is paid in interest?
2b. With regard to the bond interest payment on September 30, 2011, how much is the amortization?
2c. With regard to the bond interest payment on September 30, 2011, how much is interest expense?
3a. With regard to the bond interest payment on March 31, 2012, how much cash is paid in interest?
3b. With regard to the bond interest payment on March 31, 2012, how much is the amortization?
3c. With regard to the bond interest payment on March 31, 2012, how much is interest expense?

Explanation / Answer

1a. cash = $500,000 x 105% 1b. bond payable = the face value of the bonds sold,so the $500,000 2a. cash in interest = face value x stated rate % x 1/2 year ($500,000 x 8% x 1/2) 2b. Amortization = premium/life of bond x 1/2 year ($25,000/20 x 1/2) 2c. Interest expense = cash - amortization ($500,000 x 8% x 1/2) - ($25,000/20 x 1/2) 3a. Cash paid in interest = same as 2a 3b. Amortization = same as 2b 3c. Interest expense = same as 2c

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