Savvy Drive-Ins Ltd. borrowed money by issuing $5,500,000 of 6% bonds payable at

Question

Savvy Drive-Ins Ltd. borrowed money by issuing $5,500,000 of 6% bonds payable at 975 on July 1, 2016 Te bonds are 10-year bonds and pay interest each January 1 and July 1 How much cash did Savvy receive when it issued the bonds payable? Journalize this transaction 2. How much must Savvy pay back at maturity? When is the maturity date? 3. How much cash interest will Savvy pay each six months? 4. How much interest expense will Savvy report each six months? Assume the straight-line amortization method. Journalize the entries for accrual of interest and amortization of discount on December 31, 2016, and payment of interest on January 1, 2017 cash interest will Sa 3. How much vvy pay each six months? Savvy will pay interest of S 4. How much interest expense will Savvy report each six months? Assume the straight-line amortization method. Joumalize the entries for accrual of interest and amortization of discount on December 31, 2016, and payment of interest on each six months. January 1, 2017 Savvy will reportof interest expense each six months Journalize the entry for accrual of interest and amortization of discount on December 31, 2016. (Record debits first, then credits. Exclude explanations from any joumal entries.) Journal Entry Date Accounts Debit Credit Dec 31 Journalize the entry for the payment of interest on January 1, 2017, (Record debits first, then credits. Exclude explanations from any journal entries.)

Explanation / Answer

Solution:

Part 1 ---

Savvy received cash on issuance of bonds payable = Face Value of the bonds x 97.5%

= $5,500,000*97.5%

= $5,362,500

Journal Entry

Date

General Journal

Debit

Credit

July.1, 2016

Cash

$5,362,500

Discount on Bonds Payable (bal fig)

$137,500

Bonds Payable

$5,500,000

Part 2 --

The amount savvy will pay back at maturity is the face value of bonds = $5,500,000

Maturity Date = 1 July 2026

Part 3 –

Savvy will pay interest of $165,000 each six months.

Note -- Cash Interest will be paid in each six months = Face Value $5,500,000 * Coupon Rate 6% * ½ half yearly = $165,000

Part 4 –

Savvy will report $171,875 of interest expense each six months.

Note – Interest Expenses to be reported each six month = Cash Interest + Discount Amortization

Discount Amortization = Total Discount $137,500 / Half Yearly period to maturity 10*2

= $6,875

Interest Expenses to be reported each six month = Cash Interest 165,000 + Discount Amortization 6,875

= $171,875

Journal Entry on Dec 31, 2016 and Jan 1, 2017

Date

General Journal

Debit

Credit

Dec.31, 2016

Interest Expense

$144,375

Discount on Bonds Payable (bal fig)

$6,875

Cash Interest Payable

$137,500

Jan.1, 2017

Cash Interest Payable

137,500

   Cash

137,500

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Date

General Journal

Debit

Credit

July.1, 2016

Cash

$5,362,500

Discount on Bonds Payable (bal fig)

$137,500

Bonds Payable

$5,500,000

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