Question

In: Accounting

Carr Corporation issued $59,000 of 8 percent, 11-year bonds on January 1, Year 1, for a...

Carr Corporation issued $59,000 of 8 percent, 11-year bonds on January 1, Year 1, for a price that reflected a 9 percent market rate of interest. Interest is payable annually on December 31.

Required
a. What was the selling price of the bonds? (Round your intermediate calculations and final answer to the nearest dollar amount.)

b. Prepare the journal entry to record issuing the bonds. (Round your intermediate calculations and final answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

c. Prepare the journal entry for the first interest payment on December 31, Year 1, using the effective interest rate method. (Round your intermediate calculations and final answers to 2 decimal places. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

Requirement (a) – Selling Price of the Bond

Par Value = $59,000

Coupon Amount = $4,720 [$59,000 x 8%]

Yield to Maturity = 9%

Maturity Period = 11 Years

Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $4,720[PVIFA 9%, 11 Years] + $59,000[PVIF 9%, 11 Years]

= [$4,720 x 6.80519] + [$59,000 x 0.38753]

= $32,121 + 22,684

= $54,985

“The Selling Price of the Bond = $54,985”

Requirement (b) - Journal entry to record issuing the bond

Account Titles and Explanation

Debit ($)

Credit ($)

Cash A/c

54,985

Discount on Bond Payable A/c

4,015

To Bond Payable A/c

59000

[Entry to record the sale of Bond on January 1,2019]

                                                                                             

Issue Price of Bond = $54,985

Face Value of Bond = $59,000

Discount on Bond Payable = $4,015 [$59,000 – 54,985]

Requirement (c) - Journal entry for the first interest payment on December 31, Year 1, using the effective interest rate method

Accounts Tittles and explanations

Debit ($)

Credit ($)

Interest Expenses A/c

4,949

To Discount on Bond Payable A/c

229

To Cash A/c

4,720

[Journal entry for the first interest payment on December 31, Year 1, using the effective interest rate method]

Total Interest Expenses = $4,949 [$54,95 x 9%]

Cash payment = $4,720 [$59,000 x 8%]

Therefore, Discount on Bond Payable Amortization = $229 [$4,949 – 4,720]

ekkarill92 answered 1 year ago
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