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Gracie Corporation issued $300,000 5-year, 8% bonds for $325,591 on January 1, 2019 when the market...

Gracie Corporation issued $300,000 5-year, 8% bonds for $325,591 on January 1, 2019 when the market rate is 6%. Interest is paid semiannually every June 30 and December 31. Always assume companies use the effective-interest method.

What is the par value of the bonds, also known as the principal or face value?
What is the amount of cash Gracie Corporation receives when it issues the bonds? This is also known as the selling price or issue price of the bonds.
What is the stated rate on the bonds?
Were these bonds sold at a premium or discount? What is the amount of the premium or discount on the issue date?
Calculate the interest expense that will be recognized on June 30, 2019.
Calculate the amount of cash that will be paid on June 30, 2019.
Calculate the amortization of the discount or premium on June 30, 2019.
Calculate the ending balance in the discount or premium account on June 30, 2019.
Calculate the carrying value of the bonds on June 30, 2019.

Solutions

Expert Solution

Par value of the bonds=$ 300000
Selling price or issue price=$ 325591
Stated rate on the bonds=8%
Selling price or issue price=$ 325591
Par value of the bonds=$ 300000
Since issue price > Par value,bonds are sold at premium
Premium=Selling price-Par value=325591-300000=$ 25591
Interest expense that will be recognized on June 30, 2019=Selling price*Stated rate*(6/12)=325591*8%*(6/12)=$ 13024
(Interest computed for 6 months-Jan 1 to June 30)
Amount of cash that will be paid on June 30, 2019=Par value*Market rate*(6/12)=300000*6%*(6/12)=$ 9000
Amortization of premium on June 30, 2019=Interest expense that will be recognized on June 30, 2019-Amount of cash that will be paid on June 30, 2019
Amortization of premium on June 30, 2019=13024-9000=$ 4024
Ending balance in the premium account on June 30, 2019=Premium on isse date-Amortization of premium on June 30, 2019=25591-4024=$ 21567
Carrying value of the bonds on June 30, 2019=Selling price-Amortization of premium on June 30, 2019=325591-4024=$ 321567

ekkarill92 answered 2 years ago
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