[grandia01]

On March 1, 2007, skate inc. issued at 103 plus accrued interest two hundred of its 9%, $1,000 bonds. The bonds are dated January 1, 2007, and mature on January 1, 2017. Interest is payable semiannually on January 1 and July 1. Skate paid bond issue costs of $10,000. Skate should realize net cash receipts from the bond issuance of

$216,000
$209,000
$206,000
$199,000 <——- correct

206,000 (actual price issuance of bonds: $200,000 * 1.03)
+
3,000 (accrued interest collected: $200,000 * 9% * 2/12)
–
10,000 (issuance costs)
=
199,000

now my simple and quick question is, how come the $3,000 here is cash COLLECTED not cash PAID? Does not the face rate of bonds state the rate of cash to be paid by the issuer to the investor instead? So should not this $3,000 be cash PAID instead??

thank you guys much 🙂

[A]

3000 is the premium collected (excess over 100 par value) when the bonds were sold.

B - 77 (2.27.16)
A - 81 (4.18.16)
R -
F -

Roger Review + Ninja MCQs

[A]

Oops, disregard my bogus answer to a question you didn't ask. : )

B - 77 (2.27.16)
A - 81 (4.18.16)
R -
F -

Roger Review + Ninja MCQs

[ericl2]

It's collected because the interest isn't due until July 1st. On July 1st, you'll pay the whole 6 months of interest. The person who originally owned them owed 2 months. They paid it to you.

[mitchvols]

The purchasers of the bonds will pay interest, which will be repaid to them when the company pays interest to bond holders. The company pays a payment for interest for every bond out there in the same amount, they don't go “OK, I owe person a $100, I owe person b $200”, they pay everybody the same and to make it work by making the buyers pay for that interest.

Bond issue costs are a reduction of the carrying amount of the bond.

[grandia01]

@ mecrushya,
no worries, thank you for trying.

@ Mitch & ericl2,
thank you much for helping me out!! that was the clarification that i truly needed 🙂 🙂

[Author]

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