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  • 1.  CMA part 2 bonds help question

    Posted 12-29-2020 12:30 PM

    help understanding this question

    On November 1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 balance sheet?

    Answer (A) is correct.
    Interest payable equals the face amount of the bonds, times the nominal (stated) interest rate, times the portion of the interest period included in the accounting period. The yield rate and sale between interest periods for an amount including accrued interest do not affect interest payable. Accordingly, interest payable equals $16,000 [($800,000 × 8%) × (3 ÷ 12 months)].


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    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
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  • 2.  RE: CMA part 2 bonds help question

    Posted 12-31-2020 05:08 AM

    This is one of those questions that have extra bits of information that don't have any impact on the calculation being asked for. 


    The proceeds ($700k) of the bond are just the amount of cash actually received, but the balance sheet liability is for the full amount that will be paid at maturity ($800k), so the $700k is not necessary info.

    The yield rate is also irrelevant because that is more for investors to determine how much they will receive for purchasing the bonds than for the company. The company has to accrue based on the stated interest rate because that is what they will pay every 6 months. So ignore the 10%. 


    Plug the $800k and 8% into the interest formula for a 3 month accrual and you get $16K. 



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    Sabrina Sabin
    Accountant
    Vancouver WA
    United States
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    Original Message


  • 3.  RE: CMA part 2 bonds help question

    Posted 12-31-2020 06:45 AM
    These types of bond questions are tricky, but they make logical sense.

    Because of the way the question is set up, it makes you think you will only have 2 months of interest, as they were issued on Nov 1..  But with the bonds retroactively dated by one month., the bonds will incur one more payment.  So the face of the bond says it will do a payment in Oct, Nov and Dec,

    There is also a flip side to this question, which I think is the reason why they are asking it.  If you're an investor and going to buy the bonds, you actually have to pay extra because it has that one extra month of interest accrued.  You pay in the extra money, but you will be paid back that money when the interest is collectible.

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    George Ofslager
    Analyst
    Rock Island IL
    United States
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    Original Message