PROBLEM 6 (8 points) On January 1, Year 1, Olsen Products, Inc. issued at par, $

Question

PROBLEM 6 (8 points) On January 1, Year 1, Olsen Products, Inc. issued at par, $1 million of 10%, 10-year bonds payable. Interest is payable semiannually each June 30 and December 31. a) Record the issuance of the bonds. cash eands patble b) What is the amount of cash paid to the bondholders for interest during Year 1? $5oooo c) With respect to this bond issue, Olsen Products' balance sheet at December, Year 1, includes bonds payable of d) Give the journal entry made by Olsen Products on June 30 Year 2, to record the semiannual payment of interest to the bondholders

Explanation / Answer

a.

Journal

Date

Account titles and explanation

P.ref

Debit

Credit

Jan 1, Year 1

Cash

$1,000,000

Bonds payable

$1,000,000

To record issuance of 10%, 10-year bonds

Note: Cash should be debited because of increasing asset; bonds payable should be credited because of increasing liability.

b.

There are two semiannual interest payments in each year. Therefore, these two should be added to get the total interest during the year.

Interest of year 1 = (Par value × Rate × ½ for semiannual) + (Par value × Rate × ½ for semiannual)

                               = (1,000,000 × 10% × 0.5) + (1,000,000 × 10% × 0.5)

                               = 50,000 + 50,000

                               = $100,000 (Answer)

c.

This would be the value as per the above journal.

Bonds payable = $1,000,000 (Answer)

d.

Journal

Date

Account titles and explanation

P.ref

Debit

Credit

June 30, Year 2

Interest expense

$50,000

Cash

$50,000

To record semiannual interest payment to bond holders

Amount = (Par value × Rate × ½ for semiannual)

               = 1,000,000 × 10% × 0.5

               = $50,000

Note: Cash is credited, since it is outgoing; interest expense is debited, because it is chargeable.

Date

Account titles and explanation

P.ref

Debit

Credit

Jan 1, Year 1

Cash

$1,000,000

Bonds payable

$1,000,000

To record issuance of 10%, 10-year bonds

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