Q5SE_1 - Horngren'S Financial And Managerial Accounting

Question

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

Step-by-Step Solution

Answer

Answer:

The amount received by Savvy on the issue is $3,482,500.

Step 1: Definition of interest

Interest is the amount paid by the company to the investors or creditors against using their money for given period.

Step 2: Amount receive on the issue of bonds

In this, bonds are issued at a discount

$$\begin{gathered} PriceofBonds=Facevalueofbond\times rate \\ =\$3,500,000\times 99.50\% \\ =\$3,482,500 \end{gathered}$$

Hence, the cash received by Savvy when it issued money is $3,482,500.