Bond Street Ltd
Bond Street Ltd
Accounting question. Please give an answer ASAP?
1. Sezamee Street, LLC issued $510,000 worth of bonds on January 1, 2007. Interest payments are to be made semi-annually on June 30 and December 31 of each year. The stated interest rate on the bonds was 6% while the market rate of interest was 7%. The term of the bonds was 5 years. If the bonds were sold at 97, what is the interest expense that Sezamee would record June 30, 2007 assuming that they use the straight-line method of amortizing bond discounts and premiums?
2. Elmo’s World, Ltd issued $730,000 worth of bonds on January 1, 2009. Interest payments are to be made annually on December 31 of each year. The stated interest rate on the bonds was 8% while the market rate of interest was 6%. The term of the bonds was 10 years. If the bonds were sold at 110, what is the interest expense that Elmo would record December 31, 2010 (the 2nd year) assuming that they use the effective interest rate method of amortizing bond discounts and premiums?
Qn 1
When the bonds were issued,
Dr Cash $494,700 (0.97 x $510,000)
Dr Bond discount $15,300 (amortized over 10 periods)
Cr Bonds payable $510,000 (always face value)
On June 30,
Dr Bond interest expense $16,830 (this is the answer)
Cr Bond discount $1,530
Cr Cash $15,300 ($510,000 x 6% x 6/12)
Qn 2
When the bonds were issued,
Dr Cash $803,000 ($730,000 x 110%)
Cr Bond premium $73,000
Cr Bonds payable $730,000
On Dec 31, 2009 (1st yr),
Dr Bond interest expense $48,180*
Dr Bond premium $10,220
Cr Cash $58,400 ($730,000 x 8%)
*carrying value x market rate, so $803,000 x 6%
On Dec 31, 2010 (2nd yr),
Dr Bond interest expense $47,566.80^ (this is the answer)
Dr Bond premium $10,833.20
Cr Cash $58,400
^carrying value x market rate, so $792,780 x 6%