A company needs to raise capital for expansion purposes. Management is consideri

Question

A company needs to raise capital for expansion purposes. Management is considering issuing $10,000,000 of 7.5%, 20-year bonds dated June 1, 2001, with interest payment dates of June 1 and December 1. Their year end is December 31. If the bonds were issued on June 1, 2001 at 103 7/8, and the company uses the straight-line method of amortization, the semiannual cash payment for interest on December 1, 2001 would include a:

a) debit to interest expense for $36,531

b) credit to cash for$75,000

c) debit to premium on bonds payable for $969

d) both a & c are correct

Explanation / Answer

Bond issue price = 1000000*103.875%= 1038750 Cash interest = 1000000*7.5%/2= 37500 Premium amortization=(1038750-1000000)/40= 969 Interest expense = 37500-969= 36531 Option D both a & c are correct

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