Q5SE_3 - 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 of six months’ interest is $157,500.

Step 1: Definition of Time period

Time period is the duration in terms of days, months or year which are used to calculate the interest amount.

Step 2: Interest of six months

$$\begin{gathered} \mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{=}\mathit{f}\mathit{a}\mathit{c}\mathit{e}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{f}\mathit{b}\mathit{o}\mathit{n}\mathit{d}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\mathit{t}\mathit{i}\mathit{m}\mathit{e}\mathit{p}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{9}\mathbf{\%}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{157}\mathbf{,}\mathbf{500} \end{gathered}$$