Analyzing and journalizing bond transactions
On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payable with face value of $1,000,000. These bonds pay interest on June 30 and December 31. The issue price of the bonds is 109.Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has already been recorded.
Interest expense debited by $40,000, premium on bonds debited by $2,250 and cash credited by $42,250.
Interest expense is the expense paid the by the company to the other party for using their funds.
December 31, 2018
Premium on bonds
(Being entry for the payment of interest)
Determining bond amounts
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable at 99.5. Interest is paid semiannually.
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues
$450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The
present value of the bonds at issuance is $365,732.
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
Analyzing alternative plans to raise money
SB Electronics is considering two plans for raising $4,000,000 to expand operations.
Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common
stock. Before any new financing, SB Electronics has net income of $350,000 and
300,000 shares of common stock outstanding. Management believes the company can
use the new funds to earn additional income of $700,000 before interest and taxes.
The income tax rate is 30%. Analyze the SB Electronics situation to determine which
plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.
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