Question

Presented below are two independent situations. (a) Sage Co. sold $2,080,000 of 12%, 10-year bonds at 105 on January 1, 2020.Pharoah, Inc. had outstanding $5,770,000 of 12% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, ii am struggling with these any help would be appreciated. please also leave step by step solutions for learning purposes

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Answer #1

Answer to Question 1-A:

Face Value of Bonds = $2,080,000

Issue Value of Bonds = 105% * Face Value of Bonds
Issue Value of Bonds = 105% * $2,080,000
Issue Value of Bonds = $2,184,000

Premium on Bonds Payable = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds Payable = $2,184,000 - $2,080,000
Premium on Bonds Payable = $104,000

Time to Maturity = 10 years
Semiannual Period = 20

Annual Coupon Rate = 12.00%
Semiannual Coupon Rate = 6.00%
Semiannual Coupon = 6.00% * $2,080,000
Semiannual Coupon = $124,800

Semiannual Amortization of Premium = Premium on Bonds Payable / Semiannual Period
Semiannual Amortization of Premium = $104,000 / 20
Semiannual Amortization of Premium = $5,200

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $124,800 - $5,200
Semiannual Interest Expense = $119,600

Interest Expense recorded on July 1, 2020 and December 31, 2020 is $119,600

Answer to Question 1-B:

Issue Value of Bonds = $488,488

Annual Interest Rate = 12.00%
Semiannual Interest Rate = 6.00%

Interest Expense on October 31, 2020 = $488,488 * 6.00% * (4/6)
Interest Expense on October 31, 2020 = $19,540

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