Question

Homer Company borrowed money by issuing $4,500,000 of 8% bonds payable at 102.5 on July 1, 2018. The bonds are five-year bonds and pay interest each January 1 and July 1. Read the requirements. 1. How much cash did Homer receive when it issued the bonds payable? Journalize this transaction. Requirements - X Homer received $ when the bonds payable were issued. 1. How much cash did Homer receive when it issued the bonds payable? Journalize this transaction. How much must Homer pay back at maturity? When is the maturity date? How much cash interest will Homer pay each six months? 4. How much interest expense will Homer report each six months? Use the straight-line amortization method. Journalize the entries for the accrual of interest and the amortization of premium on December 31, 2018, and payment of interest on January 1, 2019. Print Done

Answer 1

Answer to Requirement 1.

Cash received on issuance of Bonds Payable = $4,500,000 * 102.50%
Cash received on issuance of Bonds Payable = $4,612,500

Answer to Requirement 2.

The Homer must pay back $4,500,000 at maturity. The maturity date will be June 30, 2023.

Answer to Requirement 3.

Cash Interest paid semi-annually = $4,500,000 * 8% * 6/12
Cash Interest paid semi-annually = $180,000

Answer to Requirement 4.

Premium on Issuance of Bonds Payable = $4,612,500 - $4,500,000
Premium on Issuance of Bonds Payable = $112,500

Premium on Bonds Payable to be amortized semi-annually = $112,500 * 1/5 * 6/12
Premium on Bonds Payable to be amortized semi-annually = $11,250

Interest Expense to be reported semi-annually = Interest paid – Premium on Bonds payable to be amortized
Interest Expense to be reported semi-annually = $180,000 - $11,250
Interest Expense to be reported semi-annually = $168,750

General Journal Debit Credit Date Dec 31, Interest Expense 168,750 Premium on Bonds Payable Interest Payable (To record Interest accrued) Interest Payable 2018 11,250 180,000 Jan 1, 2019 180,000 Cash 180,000 (Torecord payment of Interest)