Reilly Company issued $1,000,000 of 7%, 10 year bonds on January 1, 2012 at 105.
ID: 2490840 • Letter: R
Question
Reilly Company issued $1,000,000 of 7%, 10 year bonds on January 1, 2012 at 105. Interest is payable semiannually on July 1st and January 1st of each year. Reilly Company uses the straight-line method of amortization for bond premium or discount. Which of the choices below has the correct amounts for: (1) The cash received by Reilly at bond issuance on January 1, 2012. (2) The interest expense recorded on July 1, 2012. (3) The amortized premium on December 31, 2012. (1) Cash received at bond issuance on January 1, 2012 is $1,000,000. (2) Interest expensed on July 1, 2012 is $50,000. (3) Amortized premium on bonds payable on December 31, 2012 is $5,000. (1) Cash received at bond issuance on January 1, 2012 is $1,050,000. (2) Interest expensed on July 1, 2012 is $50,000. (3) Amortized premium on bonds payable on December 31, 2012 is $2,500. (1) Cash received at bond issuance on January 1, 2012 is $1,070,000. (2) Interest expensed on July 1, 2012 is $35,000. (3) Amortized premium on bonds payable on December 31, 2012 is $3,500. (1) Cash received at bond issuance on January 1, 2012 is $1,050,000. (2) Interest expensed on July 1, 2012 is $32,500. (3) Amortized premium on bonds payable on December 31, 2012 is $2,500.
Explanation / Answer
The correct amounts for: (1) The cash received by Reilly at bond issuance on January 1, 2012 = $1,050,000.
(2) The interest expense recorded on July 1, 2012 = $32,500
(3) The amortized premium on December 31, 2012 = $2,500.
Notes:
1. The cash received by Reilly at bond issuance on January 1, 2012 = $1,050,000.
Reilly Company issued $1,000,000 of 7%, 10 year bonds on January 1, 2012 at 105
= $1,000,000 / face value (assumed as 100) = 10,000 bonds issued at 105 each
= 10,000 * 105 = $1,050,000
2. The interest expense recorded on July 1, 2012 = $32,500
$1,000,000 bond with a stated interest rate of 7% per annum = interest expenses = 1,000,000*7% = 70,000 need to pay annual
but here, company pay's semi annual = 70,000 / 20 = $35,000 - premium on bonds payable
=35,000 - 2,500 = $32,500
3) The amortized premium on December 31, 2012 = $2,500.
In the case of the 7% $1,000,000 bond issued for $1,050,000 and maturing in 10 years, the annual straight-line amortization of the bond premium will be $5,000 ($50,000 / 10years).
for semi annual = 5,000 / 2 = $2,500