Question

the longhorn company has issued bonds with a stated rate of interest of 5% that pay interest on june 30th and december 31st each year. the bonds were issued for $5,858,431. the bonds have a principal amount of $5,000,000 and mature in 10 years. the bonds were issued on january 1st of the current year. the market rate of interest when the bonds were issued was 3%. the market rate of interest today is 7%. when the first interest payment is made on june 30th, the amount charged to bonds payable is, a. a debit of $80,045 b. a credit of $37,124 c. a debit of $37,124 d. a credit of $80,045 e. none of the above

Answer 1

None of the provided options correctly represent the amount Longhorn Company would charge to the bonds payable account upon the first interest payment. The semi-annual interest payment calculated based on the principal amount and stated interest rate is $125,000. Therefore, the answer is 'none of the above.'

Step-by-step explanation:

Understanding Bond Interest Payments

When the Longhorn Company pays interest on its bonds, the amount charged to the bonds payable account reflects the cash outflow for interest. Since the stated interest rate on the bonds is 5%, Longhorn will pay 5% of the principal amount semi-annually. The principal amount is $5,000,000, hence the company will pay:

$5,000,000 × 5% × ½ = $125,000

This is the amount of cash interest that Longhorn will pay on each interest date and is what will be credited to Bonds Payable. Therefore, option b ($37,124) and option c ($37,124) are both incorrect as they do not reflect the cash interest payment. Option a ($80,045) is also incorrect as it does not align with the correct semi-annual interest payment. Consequently, option d ($80,045) also cannot be correct.

Given this information, the correct answer concerning the account charged at the time of first interest payment on June 30th is none of the above. In actuality, Bonds Payable would be credited $125,000 when the company makes the interest payment.

Answer 2

When the first interest payment is made on June 30th, the amount charged to bonds payable is A. a debit of $80,045 (option A).

Step-by-step explanation:

When the first interest payment is made on June 30th, the amount charged to bonds payable is a debit of $80,045 (option A).

To determine this, we need to calculate the semi-annual interest payment amount.

The stated rate of interest on the bonds is 5%, which means that the annual interest payment is $5,000,000 × 5% = $250,000.

Since the payments are made semi-annually, the interest payment for one period is $250,000 ÷ 2 = $125,000.

On June 30th, half of the annual interest payment has accrued, which is $125,000 ÷ 2 = $62,500.

Therefore, the journal entry on June 30th would be:

Bonds Payable: $62,500 (debit)

Cash: $62,500 (credit)