Horton Enterprises issued $100,000, 10 year, 6% bonds payable on 1/1. Interest i

Question

Horton Enterprises issued $100,000, 10 year, 6% bonds payable on 1/1. Interest is payable each 6 months 1/1 and 7/1. The discount or premium is amortized using the straight line method. Journalize the issuance, first interest payment, and redemption of the bonds at maturity under the three conditions listed: Journalize the issuance at par value. Journalize the selling price of $90,000 when the market rate is 7 %. Journalize the selling price is $105,000 when the market rate is 5.5%. Which condition results is the most interest expense? Why (explain in detail)?

Explanation / Answer

1. Journalize the issuance at par value. Dr Cash 100,000 Cr Bonds Payable 100,000 2. Journalize the selling price of $90,000 when the market rate is 7 %. Dr Cash 90,000 Dr Discount on Bonds Payable 10,000 Cr Bonds Payable 100,000 3. Journalize the selling price is $105,000 when the market rate is 5.5%. Dr Cash 105,000 Cr Premium on Bonds Payable 5,000 Cr Bonds Payable 100,000 4. Which condition results in the most interest expense? Why (explain in detail The bonds sold at a discount will result in the most interest expense. To explain using your example: The cash interest payment will be the same, regardless of what price the bonds were sold at. (100,000 x 6%) / 2 = $3,000 cash interest payment every 6 months. If the bonds are sold at par, the cash interest payment is also the interest expense. If the bonds are sold at a premium, the amortization of the premium is SUBTRACTED from the cash payment to get the interest expense. If the bonds are sold at a discount, the amortization of the discount is ADDED to the cash payment to get the interest expense. please rate me

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