E9-50. (Learning Objectives 2, 3: Analyzing bond transactions) This (adapted) advertisement for a 20-year bond appeared in the Wall Street Chronicle.

(Note: A subordinated debenture is an unsecured bond payable whose rights are less than the rights of other bondholders.)
Requirements 1. Journalize Holiday’s issuance of these bonds payable on March 15, 20X0.
2. Compute the semi-annual cash interest payment on the bonds.
3. Compute the semi-annual interest expense under the effective interest amortization method.
4. Compute both the first-year (from March 15, 20X0, to March 15, 20X1) and the secondyear (March 15, 20X1, to March 15, 20X2) interest expense under the effective-interest amortization method. The market rate for similar bonds at the date of issuance was 13%.
Why is interest expense greater in the second year?

Transcribed Image Text:

New issue on March 15, 20X0 $800,000 HOLIDAY CORPORATION 12% Subordinated Debentures due March 15, 20Y0 interest payable March 15 and September 15 Price 94.5%