Search Textbook Sol Search Textbook solutions C On September 1,2018, Bl b on sep

Question

Search Textbook Sol Search Textbook solutions C On September 1,2018, Bl b on september 1,2018, redr newconnect.mheduca mination Help Save & Exit Sub On September 1 2018, Red Co. issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2018, and mature on May 30, 2028. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would include accrued interest of Multiple Choice Zero. $600,000. $1,200,000 $4,800,000 to search

Explanation / Answer

Answer

$ 1,200,000

Calculation of amount of accrued interest

= Face Value X Interest rate X Time period

= $ 48,000,000 X (10 /100) X (3/12)

=$ 48, 00,000 X 3/12

= $ 1,200,000 (Answer)

Note:

This is case of Cum-interest .Cum-interest is interest amount accrued in the duration between the interest payment date and transaction date or issuance date.

As the bond is issued on September 1, 2018 the buyer will receive interest on December 1 (for six months). But the buyer purchased the bond on September 1, he is entitled only to the interest of 3 months (that is from September 1, to December 1). So, he has to return 3 months interest (that is from June 1 to September 1) which is accrued to the company along with face value the bond.

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