Question

On January 1, 2021, Charles, Inc., issued 12% bonds with a face amount of $17 million. The bonds were priced at $14 million to yield 14%. Interest is paid semiannually on June 30 and December 31. Charles’s fiscal year ends September 30.
Required:
1. What amount(s) related to the bonds would Charles report in its balance sheet at September 30, 2021?
2. What amount(s) related to the bonds would Charles report in its income statement for the year ended September 30, 2021?
3. What amount(s) related to the bonds would Charles report in its statement of cash flows for the year ended September 30, 2021? In which section(s) should the amount(s) appear?

Answer 1

1.)	Balance Sheet
	As at September 30,2021		Amount $
	Bonds Payable	17,000,000
	Less: Discount on Bonds ( 3,000,000 - 399,100 )	2,600,900
	Carrying Value		14,399,100
2.)	Income Statement for	Amount $
	year ended September 30,2021
	Interest Expense	1,479,100
	{ 980,000 + (14,260,000 x 7% x 3/6 ) }
3.)	Cash Flow Statement	Amount $
	Cash Flow From operating activities
	Amortization of Discount on Bond	399,100
	{ 260000+(14260000*7%*3/6)-(12000000*6%*3/6) }
	Cash Flow from Financing Activities
	Proceeds from issue of Bonds	14,000,000

	Working
	Date	Cash Interest	Interest Expense	Discount amortization	Discount on Bond	Carrying value
		@6% of 12,000,000	@7% if carrying value
	January 01,2021				3000,000	14,000,000
	June 30,2021	720,000	980,000	260,000	2,740,000	14,260,000
	Dec.30,2021	720,000	998,200	278,200	2,461,800	14,538,200