Question

Zeus Corporation has $10,000,000 of 6.0% 25 year bonds dated July 1, 2018 with interest payable on June 30 and December 31. The corporation’s fiscal year ends on December 31, and it uses the straight line method to amortize bond premiums and discounts.

Assume the bonds are issued at 102.5 on July 1, 2018    Show your work and computations.

1. How much cash will be received on the sale?

2. How much is recorded as Bond Payable at the time of the sale?

3. What is the difference between #1 and #2 referred to and what is the dollar amount?

4. With regard to the bond interest payment on December 31, 2018:

1. How much cash is paid in interest?

2. How much is the bond amortization per period of the premium or discount?

3. What is the interest expense for the six months ended December 31, 2018?

5. What would be the “carrying value” of the bonds as of June 30, 2019 (one year later)?

Answer 1

Working notes: Bond payable Face value Bond payable issue price $10,000,000 $10,250,000 102.5% of face value i) Cash received on sale $10,250,000 ii) Bond payable recorded $10,000,000 iii) Premium on bonds payable $250,000 a Cash Interest $300,000 6% of $10,000,000 for 6 months b Discount amortized $5,000 Discount on bonds payable Total term of interest payments Premium amortized per term $250,000 50 (25*2) $5,000 $273,168/20 c Interest expense $295,000 Cash interest Premium amortized per term Interest expense $300,000 6% of $10,000,000 for 6 months $5,000 $295,000 d Bond carrying value, 30th June 2019 Long term liabilities Bond payable $10,000,000 Premium on bonds payable $240,000 $10,240,000 Premium on bonds payable is after reducing total $10,000 amortization for 2 periods