[vodrldnr]

I found this problem from wiely

On November 1, year 1 mason corp issued $800,000 of its ten year 8% term bonds dated October year 1.

the bond were sold to yield 10% with total proceeds of 700,000 plus accrued interest.

Interest paid every April 1 and October 1.

Mason does not elect the fair value option for reporting financial liability.

what amount should mason report for interest payable in its December 31 year 1 Balance sheet ?

answer : 16,000

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I feel like I do not have some common sense to understand the bond..

my question is like ..

1. is bond interest always based on annual period? (I am not talking about the payment date since I know it can be annual or semi annual etc … ) I feel like all the problem assume the interest is based on annual calculation.

2. is interest counted based on dated date ? not issue date? then why they are sometimes different date and sometimes the same ?

plz … I am doing MCQ but since I do not have those basic understanding I keep getting all question wrong …

[klmrr2]

I'm confused by your two questions.. But this is my explanation for how they got the answering and my reasoning:

Interest for each year would be based on the 8% * $8,000,000, or $64,000.

Interest was paid on October 1 this year and is being accrued to be paid on March 1 next year. The accrued amount would be the interest payable on December 31 since it was earned this year but not paid until next. From October to December is a total of 4 months, so the interest payable would be $64,000 * (4/12), or $16,000.

Does that help?

[Nick_P]

Someone correct me if incorrect but I believe Interest payable is based on the Face amount of the bond x the stated rate x time. Interest accrues from the date of the bond,Oct 1, not the issue date. Since the interest payments are April 1 and Oct 1 the interest from April 1 to Oct 1 is already accounted for. We need to calculate the interest from Oct 1 to Dec 31 or 3 months. Thus our bond face is 800,000 our stated rate is 8% and our time is 3/12; therefore, accrued interest is 800,000 x .08 x 3/12 = 16,000.

[hasy]

@klmrr2, Oct, Nov & Dec is 3 months. Nick_P is correct, it's 800000*0.08*(3/12) = 16,000.

Just so the OP doesn't get confused.

1) Bond interest given is usually an annual percentage.

Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved - Helen Keller

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[vodrldnr]

klmrr2

so.. my question is

when calculating interest revenue or expense, is it assumed that the interest is annual base ???

and is semi annual and quarterly payment of interest just about how distribute the interest within a year ???

Does my question make sense ???

I know the interest can be paid any date or any month depending on the term and agreement.

but question is whether the interest is always one year base or not.

For example

the problem I posted above says 10% yield. does it mean that 10% interest is generated within one year time frame ?? since there is no mention about it, I am confused if 10% interest is generated within one year period or two year period three year ,,? or is it just commonsense that the interest is generated on one year period base ?

[Author]

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