Question

On September 1, 2021, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 11%. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:

Answer 1

$1,608,000

Step-by-step explanation:

the clean price = $1,600,000 x 0.98 = $1,568,000 (it does not include accrued interests)

accrued interests = $1,600,000 x 10% x 3/12 months = $40,000

dirty price = clean price + accrued interests = $1,568,000 + $40,000 = $1,608,000

the journal entry should be:

September 1, 2021

Dr Cash 1,608,000

Dr Discount on bonds payable 32,000

Cr Bonds payable 1,600,000

Cr Interest payable 40,000