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?
The amount received by Savvy on the issue is $3,482,500.
Interest is the amount paid by the company to the investors or creditors against using their money for given period.
In this, bonds are issued at a discount
Hence, the cash received by Savvy when it issued money is $3,482,500.
Analyzing and journalizing bond transactions
On January 1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 and December 31.
1. If the market interest rate is 5% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 8% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 93. 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.
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