Question

Claire Corporation is planning to issue bonds with a face value of $150,000 and a coupon rate of 8 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Claire uses the effective-interest amortization method and does not use a discount account. Assume an annual market rate of interest of 12 percent.  (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)  

1. Provide the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to nearest whole dollar amount.)

Answer 1

Step-1:Calculate current price
Current Price	$ 1,39,470
Working:
a.	Present value of iinterest	Quarterly coupon interest x Present value of annuity of $ 1	$                             3,000	x	7.0197	=	$   21,059
	Present value of maturity value	Face Value x Discount factor	$                        1,50,000	x	0.7894	=	$1,18,411
	Price of bond						$1,39,470
b.	Present value of annuity of $ 1	=	(1-(1+i)^-n)/i		Where,
		=	(1-(1+0.03)^-8)/0.03		i	0.03
		=	7.0197		n	8
c.	Discount factor	=	1.03^-8
		=	0.7894
d.	Quarterly Interest payment	=	Face Value X Interest rate
		=	$ 1,50,000	x	2.0%
		=	$ 3,000
Step-2:Journal entry to record the issuance
Date	Account title and explanation	Debit	Credit
;January 1	Cash	$ 1,39,470
	Discount on bonds payable	$ 10,530
	Bonds Payable		$ 1,50,000
	(To record bond issued at discount)