If interest is not paid in the first month of bond issuance then why is june 30t
ID: 2391123 • Letter: I
Question
If interest is not paid in the first month of bond issuance then why is june 30th interest payment calculated at (12% x 6/12 X 739,814,813?). Even though it says interest is paid semiannually, the period from bond inception to june is only 5 months when not counting the month the bond was issued (January).
| Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $800 million on January 1, 2018. The bonds sold for . $739,814,813 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is pald semlannually on June 30 and December 31. Requlred 1. to 3. Prepare the journal entry to record thelr Issuance by Federal on January 1, 2018, Interest on June 30, 2018 (at the effective rate) and Interest on December 31, 2018 (at the effective rate). 4. At what amount will Federal report the bonds among its llablities In the December 31, 2018, balance sheet? Complete this question by entering your answers in the tabs below Show less Req 1 to 3 Req 4 Prepare the journal entry to record their issuance by Federal on January 1, 2018, interest on June 30, 2018 (at the effective rate) and interest on December 31, 2018 (at the effective rate). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) Date General Journal Debit Credit January 01 2018 Cash 739,814,813 Discount on bonds payable 60,185,187 Bonds payable 800,000,000 June 30, 2018 Interest 44,388.89 388.889 44,000,000 Discount on bonds payable CashExplanation / Answer
Answer
---Bonds issued on 1 Jan 2018 of $ 800 million at 11%
---Interest is payable semi annually, on 30 June and on 31 Dec each year, for 20 years.
---Market interest rate = 10%
6 months = 1 Jan 2018 to 30 June 2018 [Jan – Feb – Mar – Apr – May – June = 6 months]
Next 6 months = 1 Jul to 31 Dec [ Jul – Aug – Sept – Oct – Nov – Dec = 6 months.
Period
Cash payment
Interest expense
Discount on Bonds payable
Carrying Value of Bond
[A]
[B]
[C = B – A]
Issued on 1 Jan 2018
$ 739,814,813.00
30-Jun-18
$ 44,000,000.00 [800 million x 11% x 6/12]
$ 44,388,889 [739814813 x 10% x 6/12]
$ 388,889
$ 740,203,702
31-Dec-18
$ 44,000,000.00 [800 million x 11% x 6/12]
$ 44,412,222 [740203702 x 10% x 6/12]
$ 412,222
$ 740,615,924
Date
Accounts titles
Debit
Credit
01-Jan-18
Cash
$ 7398,14,813
Discount on Bonds Payable
$ 601,85,187
Bonds payable
$ 8000,00,000
30-Jun-18
Interest expense
$ 443,88,889
Discount on Bonds Payable
$ 3,88,889
Cash
$ 440,00,000
31-Dec-18
Interest expense
$ 444,12,222
Discount on Bonds Payable
$ 4,12,222
Cash
$ 440,00,000
Period
Cash payment
Interest expense
Discount on Bonds payable
Carrying Value of Bond
[A]
[B]
[C = B – A]
Issued on 1 Jan 2018
$ 739,814,813.00
30-Jun-18
$ 44,000,000.00 [800 million x 11% x 6/12]
$ 44,388,889 [739814813 x 10% x 6/12]
$ 388,889
$ 740,203,702
31-Dec-18
$ 44,000,000.00 [800 million x 11% x 6/12]
$ 44,412,222 [740203702 x 10% x 6/12]
$ 412,222
$ 740,615,924
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