Question

QUESTION 18 On April 1, year 1, UltraSpace Corporation issues $60 million of 12 % , 10- year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1. The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves O recognition of interest expense of $3,600,000 recognition of interest expense of $1,800,000 O payment of cash of $1,800,000 There is no adjustment necessary

Answer 1

CALCULATION OF ADJUSTING ENTRY OF BOND ISSUE
Par value of the bond is 60 Million =	$                      6,00,00,000
Coupon Rate =	12%
Coupon Amount =	$                         72,00,000
Half yearly coupon amount = $ 7,200,000 / 2 =	$                         36,00,000
Above amount will ne paid as on Oct, 01
but at the end of year as on December 31 year 1 interest of three month is accrue but not paid
Interest for the period pf Oct ,Nov & Dec for 3 month =	$                         18,00,000
	($ 7,200,000 X 3 / 12 month)
So for adjusting we have to recognise the interest expenses of $ 1,800,000
Answer = Option 2 = Recognition of interest expenses of $ 1,800,000