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

ekkarill92 answered 1 year ago

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