Paco Corporation has $16,000,000 of 9.5 percent, 25-year bonds dated March 1, wi
ID: 2376107 • Letter: P
Question
Paco Corporation has $16,000,000 of 9.5 percent, 25-year bonds dated March 1, with interest payable on March 1 and September 1. The company%u2019s fiscal year ends on November 30. It uses the effective interest method to amortize bond premiums or discounts. (Round amounts to the nearest dollar.)
a. Assume the bonds are issued at 102.5 on March 1 to yield an effective interest rate of 9.2 percent. Prepare entries in journal form for March 1 to show sale of the bonds, September 1 to show paid interest, and November 30 to show accrued interest.
b. Assume the bonds are issued at 97.5 on March 1 to yield an effective interest rate of 9.8 percent. Prepare entries in journal form for March 1 to show sale of the bonds, September 1 to show paid interest, and November 30 to show accrued interest.
Explanation / Answer
a. cash Debit 16000000
bonds 16000000
sept.1 Interest exp. 736000
cash Credit 736000
nov.30 interest exp. debit 368000
interest payable 368000
b. cash Debit 16000000
bonds 16000000
sept.1 Interest exp. 784000
cash Credit 784000
nov.30 interest exp. debit 392000
interest payable 3920000
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