On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par....

Question:

On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

The amount of cash paid to bondholders for interest during Year 1, is:

a. $5,400,000.

b. $3,600,000.

c. $6,600,000.

d. $1,800,000.

Bond:

Interest to be paid on bond payable is computed by multiplying the face value of bond payable with the coupon rate as mentioned in the bond indenture. If the interest is paid semi-annually then, one interest payment would fall in the next period.

Answer and Explanation:

The correct answer is option (b).

The amount of cash paid to bondholders for interest during Year 1, is is $3,600,000.

Explanation: The amount of cash paid to bondholders for interest during Year 1, is is $3,600,000 ($60,000,000 x 12%/2). During the first year only interest amount would be paid on 1st October.


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