Question
In: Accounting
Arizona Corporation issues term bonds with a face value of $800,000 on January 1, Year One....
Arizona Corporation issues term bonds with a face value of $800,000 on January 1, Year One. The bonds have a stated rate of interest of 7 percent per year and a life of six years. They pay interest annually on December 31. These bonds were issued at $695,470 to create an effective annual rate of 10 percent.
a. What journal entry does the company make on January 1, Year One, when the bonds are issued?
b. What journal entry or entries does the company make on December 31, Year One?
c. What is the liability balance reported on the December 31, Year One, balance sheet?
d. What journal entry or entries does the company make on December 31, Year Two?
e. What is the liability balance reported on the December 31, Year Two, balance sheet?
Solutions
Expert Solution
a) Journal entry
| Date | account and explanation | debit | credit |
| Jan 1 | Cash | 695470 | |
| Discount on bonds payable | 104530 | ||
| Bonds payable | 800000 | ||
| (To record bond issue) |
b) Journal entry
| Date | account and explanation | debit | credit |
| Dec 31 | Interest expense | 38578 | |
| Discount on bonds payable (104530/6) | 17422 | ||
| Cash (800000*7%) | 56000 | ||
| (To record interest) |
c) Balance sheet
| Long term liabilities | ||
| Bonds payable | 800000 | |
| Less: Discount on bonds payable (104530-17422) | -87108 | 712892 |
d) Journal entry
| Date | account and explanation | debit | credit |
| Dec 31 | Interest expense | 38578 | |
| Discount on bonds payable (104530/6) | 17422 | ||
| Cash (800000*7%) | 56000 | ||
| (To record interest) |
e) Balance sheet
| Long term liabilities | ||
| Bonds payable | 800000 | |
| Less: Discount on bonds payable (104530-17422-17422) | -69686 | 730314 |
Note : i have done question with straight line method if you want
effective interest then please ask
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